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Updated April 20, 2018
Debates over Currency Manipulation
Overview
models to estimate whether the actual value of a currency
Some Members of Congress and policy experts argue that
differs from what it “should” be according to economic
U.S. companies and jobs have been adversely affected by
fundamentals. Various models produce different results.
the exchange rate policies adopted by China, Japan, and a
number of other countries. They allege that these countries
Over the past decade, some policymakers and analysts have
use policies to “manipulate” the value of their currency in
alleged that China uses policies to keep the value of its
order to gain an unfair trade advantage against other
currency artificially low, making it harder for U.S. goods to
countries, including the United States.
compete in global markets. In recent years, slowing growth
in China has put downward pressure on its currency and its
Other analysts are more skeptical about currency
central bank has intervened in foreign exchange markets to
manipulation being a significant problem. They raise
prevent further depreciation of its currency since mid-2015.
questions about whether government policies have long-
The IMF estimates that the value of China’s currency is
term effects on exchange rates, whether it is possible to
currently in line with economic fundamentals. Some argue
differentiate between “manipulation” and legitimate central
that more assertive action on China currency could bolster
bank activities, and the net effect of currency manipulation
U.S. competitiveness, while others caution that it does not
on the U.S. economy.
reflect current Chinese economic policies and risks
triggering a trade war with China.
Background
What is currency manipulation? At the heart of current
Some policymakers and analysts have also voiced concerns
debates is whether or not other countries are using policies
more generally about currency manipulation, particularly as
to intentionally weaken the value of their currency, or
the dollar began to strengthen in recent years (Figure 1)
sustain a weak currency, to gain a trade advantage. A weak
and makes it more difficult for U.S. exports to compete
currency makes exports less expensive to foreigners, which
overseas and U.S. industries to compete with imports.
can spur exports and job creation in the export sector.
Figure 1. U.S. Dollar Index (Major Currencies)
Can governments weaken their currencies? Economists
disagree about whether government policies have long-term
effects on exchange rates, particularly for countries with
floating exchange rates. However, some economists believe
that, at least in the short run, some government policies can
impact the value of currencies. One policy is buying and
selling domestic and foreign currencies (“intervening”) in
foreign exchange markets. Another is monetary policy, the
process by which the central bank controls the supply of
money in an economy. It is important to note that although
these policies can affect exchange rates, they may be
implemented for other reasons, such as increasing foreign
exchange reserves or combatting a domestic recession.
What is the impact on the United States? If another
country weakens its currency relative to the dollar, U.S.
exports to the country may be more expensive and U.S.
Source: Federal Reserve.
imports from the country may be less expensive. As a
Notes: An increase on the graph represents an appreciation of the
result, U.S. exports to the country may be negatively
U.S. dollar against other currencies.
affected, and U.S. producers of import-sensitive goods may
find it hard to compete with imports from the country. On
Existing Policy Frameworks
the other hand, U.S. consumers who buy imports and U.S.
Multilaterally, members of the International Monetary Fund
businesses that rely on inputs from overseas may benefit,
(IMF) have committed to refraining from manipulating
because goods from the country may be less expensive.
their exchange rates to gain an unfair trade advantage.
Violators could face loss of IMF funding, suspension of
Which countries are accused of currency manipulation?
voting rights or, ultimately, expulsion from the IMF. The
There is debate over which countries, if any, are
IMF has never publicly labeled a country as a currency
manipulating their exchange rates. Part of the debate is
manipulator. Some argue that commitments made in the
which, if any, government policies should count as currency
context of the World Trade Organization (WTO) are
manipulation. Economists have also developed a number of
relevant to disagreements over exchange rates, although this
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Debates over Currency Manipulation
view is debated. Exchange rates are also discussed by the
Recent Developments
G-7 and the G-20, where commitments to refrain from
Debates about currency manipulation, including the extent
currency manipulation are now routinely emphasized.
to which other countries are engaged in manipulation and
what, if anything, the United States should do to address it,
continue.
“We recognize that excessive volatility or disorderly
During the 2016 presidential campaign, combatting
movements in exchange rates can have adverse
currency manipulation, particularly by China, was a key
implications for economic and financial stability. We
issue for Donald Trump. Since assuming office, President
will refrain from competitive devaluations, and will not
Trump has continued to express concerns about the
target our exchange rates for competitive purposes.”
exchange rate policies of other countries, although the
G-20 Finance Ministers and Central Bank Governors
Treasury Department has not formally labeled a country as
Communiqué, March 19-20, 2018.
a currency manipulator.
In the renegotiation of the North American Free Trade
Provisions in U.S. law also address currency manipulation.
Agreement (NAFTA), the Trump Administration has
The 1988 Trade Act (P.L. 100-418) requires the Treasury
identified combatting currency manipulation as a
Department to analyze semiannually the exchange rate
negotiating objective. In March 2018, the Administration
policies of major U.S. trading partners. If some countries
announced that, through negotiating modifications to the
are found to be manipulating their currencies, the Act
U.S.-South Korea Free Trade Agreement (KORUS FTA),
requires the Treasury Secretary, in some instances, to
initiate negotiations to eliminate the “unfair” trade
the Treasury Department was finalizing a side agreement on
currency with South Korea. The details of the agreement
advantage. The Act also has a semiannual reporting
are not yet public.
requirement on exchange rates in major trading partners.
Treasury has not found currency manipulation under the
Possible Policy Issues
terms of the Act since 1994.
How should currency manipulation be defined and
measured? Analysts debate how to define currency
The Trade Facilitation and Trade Enforcement Act of
manipulation. Some argue that the IMF’s definition requires
2015 (P.L. 114-125) also directs the Treasury Department
it to determine that policies shaping the exchange rate level
in some instances to take action against countries that have:
have been for the express purpose of increasing net exports,
(1) a significant bilateral trade surplus with the United
and that “intent” is hard to establish. Analysts also disagree
States; (2) a material current account surplus; and (3)
on how to calculate or estimate whether currencies are
engaged in persistent, one-sided interventions in foreign
misaligned from their “equilibrium” long-term value,
exchange markets. Some economists contend that, together,
complicating the classification of currencies as over- or
these three indicators suggest currency manipulation. To
under-valued.
date, Treasury has not found a country that meets all three
criteria. However, it has developed a new “Monitoring
List,” which includes major trading partners that meet two
Should currency manipulation be addressed in trade
agreements? Some argue that, given the links between
of the three criteria currently or in the past year. The
exchange rates and trade, addressing currency manipulation
Monitoring List for April 2018 includes China, Japan,
in a trade agreement is critical. Others disagree, since any
Germany, South Korea, Switzerland, and India. The
agreement on currencies would apply only to parties of the
legislation also enhances Treasury reporting on exchange
agreement and could make the agreement more difficult to
rates, and establishes an advisory committee on
conclude.
international exchange rate policy to advise the Treasury
Secretary.
Would measures to combat currency manipulation
serve U.S. economic interests? Some analysts argue that
In 2015, Congress included currency as a principal
currency manipulation gives other countries an unfair
negotiating objective in Trade Promotion Authority
competitive trade advantage over the United States. Others
legislation for the first time (P.L. 114-26). TPA is the
disagree, arguing that the effects on the U.S. economy are
authority Congress grants to the President to enter into
not unambiguously negative. U.S. consumers and U.S.
certain reciprocal trade agreements and to have their
businesses that rely on inputs from overseas may benefit
implementing bills considered under expedited legislative
when other countries have weak currencies. They also
procedures when certain conditions have been met. Largely
caution that labeling other countries as currency
in response to the TPA legislation, the United States was a
manipulators could trigger retaliation, making it more
key driver in negotiating an agreement in 2015 to combat
difficult for the United States to finance its trade deficit.
currency manipulation among the 12 countries negotiating
the Trans Pacific Partnership (TPP), a proposed free trade
For more information, see CRS Report R43242, Current
agreement. The currency side agreement was to become
Debates over Exchange Rates: Overview and Issues for
effective if and when the TPP entered into force. President
Congress, by Rebecca M. Nelson.
Trump withdrew the United States from the TPP in January
2017. The other 11 TPP countries forged ahead with a trade
Rebecca M. Nelson, Specialist in International Trade and
agreement in March 2018.
Finance
IF10049
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Debates over Currency Manipulation
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https://crsreports.congress.gov | IF10049 · VERSION 11 · UPDATED