[Song Seungseop's Financial Light] Why Does the US Announce Currency Manipulator Countries?

1985 Reagan's 'Trade Act' as the Origin
If Large Surpluses Against the US, Designated as 'Currency Manipulator'
In 2015, Obama Created 'Trade Facilitation Act'
Established 3 Criteria and Strengthened Monitoring of Trading Partners' Exchange Rate Policies
China Was Actually Designated as Currency Manipulator in 2019

On the 17th local time, the U.S. government designated South Korea as a "currency monitoring country." It was judged to be a country that needs to be observed to see if it is manipulating its exchange rate in a favorable direction. Along with South Korea, China, Switzerland, Germany, Malaysia, Singapore, and Taiwan were also selected as currency monitoring countries. Why is the U.S. interested in other countries' exchange rate policies?

The more trade, the more losses?angry U.S. starts monitoring currency manipulation

This is because exchange rates affect the trade balance. Imagine the exchange rate was 1,000 won to 1 dollar, but it rose to 2,000 won to 1 dollar. Korean exporters would earn twice the profit by selling just 1 dollar in the U.S. On the other hand, U.S. exporters who used to earn 2 dollars by selling 2,000 won in Korea would see their profits plummet to 1 dollar due to the exchange rate. In other words, if a country manipulates its exchange rate, it can gain enormous advantages in international trade.

In the 1980s, this issue was raised in the U.S. At that time, American products were not selling well, and the U.S. repeatedly experienced trade deficits the more it traded. American politicians, businesspeople, and the public claimed that other countries were engaging in unfair trade based on favorable exchange rates. Japan, which had achieved rapid growth in the 1970s, was especially targeted. By 1985, the U.S. was suffering losses to the extent that its trade deficit reached 1.15% of its Gross Domestic Product (GDP).

Ronald Reagan, the 40th President of the United States

Then, even U.S. President Ronald Reagan stepped in. In a 1985 speech, President Reagan said, "We will not stand idly by while our companies fail due to unfair foreign trade practices." Subsequently, in 1988, the "Omnibus Foreign Trade and Competitiveness Act" (Comprehensive Trade Act) was enacted. It explicitly granted the U.S. the authority to retaliate if a petition by American companies claiming damage from unfair trade by other countries was ignored. The term "currency manipulator" was used for the first time here. If a country ran a large surplus against the U.S., it could be designated as a currency manipulator to pressure the counterpart country.

Obama also said "Currency manipulation violates international trade law"…Trade Facilitation Act targeting South Korea, China, and Japan

In 2015, the U.S. enacted a similar "Trade Facilitation Act." The reason was again trade. Then-President Barack Obama repeatedly emphasized that "currency manipulation violates international trade law." The U.S. Treasury pointed out that countries with large surpluses against the U.S., such as Germany, China, Japan, and South Korea, needed to adopt more balanced economic policies. In South Korea's case, it was argued that the won was undervalued based on the current account surplus, trade surplus, and foreign exchange reserves.

The newly introduced Trade Facilitation Act requires semiannual reports in April and October to Congress on the economic and exchange rate policies of trading partners. Exchange rate policies are judged based on three criteria: ① a significant trade surplus with the U.S. exceeding $20 billion in the past year, ② a substantial current account surplus exceeding 2% of GDP, and ③ persistent and unilateral intervention in the foreign exchange market by net purchasing foreign currency exceeding 2% of GDP over 12 months. If a country meets two of these criteria, it becomes a monitoring country; if all three, it becomes a subject of in-depth analysis.

If a country becomes a subject of in-depth analysis, it may be listed as a currency manipulator by the U.S. Treasury. Then, the U.S. government takes action according to the law. Negotiations begin for one year to resolve the issue with the currency manipulator. If no agreement is reached, investments by U.S. companies are restricted. Also, companies from the currency manipulator country are barred from entering markets funded by the U.S. government, and financial support is cut off. Surveillance by the International Monetary Fund (IMF) and the World Trade Organization (WTO) also becomes stricter.

Aftermath of yuan devaluation…China designated as a currency manipulator for the first time in 25 years

Graph trend of the Chinese yuan exchange rate in May 2019. It surpassed 7 yuan per dollar. Source: Bloomberg

There have been countries actually designated as currency manipulators. China is one of them. On August 5, 2019, the U.S. Treasury designated China as a currency manipulator. It was the first time in 25 years since the Clinton administration in 1994. Then-Treasury Secretary Steven Mnuchin pointed out that China took specific measures to lower the value of its currency. In fact, the yuan's value against the dollar surpassed 7 in May 2019, an event that had not occurred in 11 years and 3 months. When the yuan depreciates, the prices of Chinese exports fall, causing losses to the U.S. naturally.

What about South Korea? South Korea is also one of the countries frequently subject to U.S. currency monitoring. Around the 1990s, it was designated as a currency manipulator, and since the late 2010s, it has been a monitoring country. Especially since the Trade Facilitation Act came fully into effect in April 2016, South Korea has been on the list every time except the first half of 2019. This time, with a trade surplus of $37 billion, it met criterion ① and became a monitoring country. Although the original rule requires meeting two criteria to be a monitoring country, once designated, a country is kept on the monitoring list at least twice. Just before this, South Korea was listed as a monitoring country due to its trade surplus with the U.S. and current account surplus relative to GDP.

Editor's NoteFinance is difficult. Confusing terms and complex backstories are intertwined. Sometimes, you need to learn dozens of concepts just to understand one word. Yet finance is important. To understand the philosophy of fund management and consistently follow the flow of money, basic financial knowledge is essential. Therefore, Asia Economy selects one financial issue every week and explains it in very simple terms. Even those who know nothing about finance can immediately understand these "light" stories that illuminate the "fire" of finance.