U.S. Currency Monitoring List
Context:
The U.S. Treasury has released the report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States. The April 2021 edition of the semi-annual report is the first from the Biden administration.
The report is submitted to the U.S. Congress and reviews currency practices of the U.S.’s 20 biggest trading partners.
Three criteria are used to review partners:
- A significant (at least $20 billion) bilateral trade surplus.
- A material current account surplus.
- Persistent one-sided intervention in forex markets.
Highlights of the latest report:
- India is one of the 11 countries on the ‘Monitoring List’ with regard to their currency practices.
- India was on the list in the December 2020 report as well.
- The other 10 countries on the list with India are China, Japan, Korea, Germany, Ireland, Italy, Malaysia, Singapore, Thailand, and Mexico.
- India met two of the three criteria — the trade surplus criterion and the “persistent, one-sided intervention” criterion.
What is currency manipulation?
- US government labels those countries with this term who it feels are engaging in unfair currency practices by devaluing their currency against dollar purposely.
- It means that the country in question is trying to artificially lower the value of its currency to gain an advantage over others.
- The devaluation in turn lowers the cost of exports from that country. It then artificially shows reduced trade deficits.
What is the effect of being on the list?
The designation of a country as a currency manipulator does not mean any penalties are imposed immediately, but in the longer run, it dents the confidence about a country in the global financial markets.
What puts a country on the Currency Monitoring List?
The country needs to meet two of the three criteria in the Trade Facilitation and Trade Enforcement Act of 2015. The conditions are:
- In case a country has incurred a significant bilateral trade surplus with the US, it is included in the list. The surplus however should be at least $20 billion over a 12-month period.
- In case any country has a material current account surplus that meets at least 2 per cent of gross domestic product over 1 year.
- In case any country is involved in a persistent, one-sided intervention that is when net purchases of foreign currency totaling at least 2 per cent of the country’s GDP over a 12 month period are conducted repeatedly, in at least six out of 12 months.