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Updated June 24, 2019
Debates over Currency Manipulation
Overview
manipulation. Economists have also developed a number of
Some Members of Congress and policy experts argue that
models to estimate whether the actual value of a currency
U.S. companies and jobs have been adversely affected by
differs from what it “should” be according to economic
the exchange rate policies adopted by other countries. They
fundamentals. Various models produce different results.
allege that these countries use policies to “manipulate” the
value of their currency in order to gain an unfair trade
According to a 2017 study by economists at the Peterson
advantage against other countries, including the United
Institute for International Economics, currency
States.
manipulation has largely been in remission since 2014. The
Treasury Department since President Trump took office has
Other analysts are more skeptical about currency
not formally found any country to be manipulating its
manipulation being a significant problem. They raise
currency in its semiannual report to Congress. China's
questions about whether government policies have long-
interventions in foreign exchange markets to limit
term effects on exchange rates, whether it is possible to
appreciation of its currency largely occurred between 2003
differentiate between “manipulation” and legitimate central
and 2014. However, recent depreciation of China’s
bank activities, and the net effect of currency manipulation
currency, as well as a relatively strong U.S. dollar (Figure
on the U.S. economy.
1), may be fueling Administration concerns. A strong dollar
makes it more difficult for some U.S. firms to compete
Background
against foreign producers.
What is currency manipulation? At the heart of current
debates is whether or not other countries are using policies
Figure 1. Nominal Broad Dollar Index
to intentionally weaken the value of their currency, or
sustain a weak currency, to gain a trade advantage. A weak
currency makes exports less expensive to foreigners, which
can spur exports and job creation in the export sector.
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. A number of economic policies,
including monetary, fiscal, and structural policies, may also
affect exchange rate levels but they may be pursued for
Source: Federal Reserve.
policy goals unrelated to trade. For example, a central bank
Notes: An increase on the graph represents an appreciation of the
may adopt expansionary monetary policies to combat a
U.S. dol ar against other currencies.
domestic recession, while having the simultaneous effect of
depreciating the currency.
Existing Policy Frameworks
Multilaterally, members of the International Monetary Fund
What is the impact on the United States? If another
(IMF) have committed to refraining from manipulating
country weakens its currency relative to the dollar, U.S.
their exchange rates to gain an unfair trade advantage.
exports to the country may be more expensive and U.S.
Violators could face loss of IMF funding, suspension of
imports from the country may be less expensive. As a
voting rights or, ultimately, expulsion from the IMF. The
result, U.S. exports to the country may be negatively
IMF has never publicly labeled a country as a currency
affected, and U.S. producers of import-sensitive goods may
manipulator. Some argue that commitments made in the
find it hard to compete with imports from the country. On
context of the World Trade Organization (WTO) are
the other hand, U.S. consumers who buy imports and U.S.
relevant to disagreements over exchange rates, although this
businesses that rely on inputs from overseas may benefit,
view is debated. Exchange rates are also discussed by the
because goods from the country may be less expensive.
G-7 and the G-20, where commitments to refrain from
currency manipulation are now routinely emphasized.
Which countries are accused of currency manipulation?
There is debate over which countries, if any, are
Provisions in U.S. law also address currency manipulation.
manipulating their exchange rates. Part of the debate is
The 1988 Trade Act (P.L. 100-418) requires the Treasury
which, if any, government policies should count as currency
Department to analyze semiannually the exchange rate
policies of major U.S. trading partners. If some countries
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Debates over Currency Manipulation
are found to be manipulating their currencies, the Act
dollar. Public comments on the proposal are being accepted
requires the Treasury Secretary, in some instances, to
through June 27.
initiate negotiations to eliminate the “unfair” trade
advantage. The Act also has a semiannual reporting
The new tool proposed by the Commerce Department has
requirement on exchange rates in major trading partners.
been discussed for years in Congress. Under current U.S.
Treasury has not found currency manipulation under the
law, countervailing duties can be applied to imports that
terms of the Act since 1994.
have been subsidized by a foreign government. Some argue
that currency manipulation is the functional equivalent of a
The Trade Facilitation and Trade Enforcement Act of
subsidy, and this should also be an “actionable” subsidy
2015 (P.L. 114-125) adds new reporting requirements and
under U.S. law (meaning that it is eligible for
directs the Treasury Department in some instances to take
countervailing duties).
action against countries that have: (1) a significant bilateral
trade surplus with the United States; (2) a material current
However, applying countervailing duties to imports from
account surplus; and (3) engaged in persistent, one-sided
countries that manipulate their currencies is controversial.
interventions in foreign exchange markets. Some
Of the six public comments submitted to date, most,
economists contend that, together, these three indicators
including from a former Treasury official, oppose the
suggest currency manipulation. To date, Treasury has not
proposal. Concerns focus on how it could be
found a country that meets all three criteria. However, it has
operationalized, whether it is consistent with U.S.
developed a “Monitoring List,” which includes countries
obligations under the World Trade Organization (WTO),
that meet two of the three criteria currently or in the past
and whether it would help the U.S. economy.
year. The Monitoring List for May 2019 includes China,
Japan, Germany, Italy, Ireland, Singapore, Malaysia, South
Possible Policy Issues
Korea, and Vietnam.
How should currency manipulation be defined and
measured? Analysts debate how to define currency
In 2015, Congress included currency as a principal
manipulation. Some argue that the IMF’s definition requires
negotiating objective in Trade Promotion Authority
it to determine that policies shaping the exchange rate level
legislation for the first time (P.L. 114-26). TPA is the
have been for the express purpose of increasing net exports,
authority Congress grants to the President to enter into
and that “intent” is hard to establish. Analysts also disagree
certain reciprocal trade agreements and to have their
on how to calculate or estimate whether currencies are
implementing bills considered under expedited legislative
misaligned from their “equilibrium” long-term value,
procedures when certain conditions have been met.
complicating the classification of currencies as over- or
Previously, exchange rates were not generally part of trade
under-valued.
negotiations.
Would measures to combat currency manipulation
serve U.S. economic interests? Some analysts argue that
“We recognize that excessive volatility or disorderly
currency manipulation gives other countries an unfair
movements in exchange rates can have adverse
competitive trade advantage over the United States. Others
implications for economic and financial stability. We
disagree, arguing that the effects on the U.S. economy are
will refrain from competitive devaluations, and will not
not unambiguously negative. U.S. consumers and U.S.
target our exchange rates for competitive purposes.”
businesses that rely on inputs from overseas may benefit
G-20 Finance Ministers and Central Bank Governors
when other countries have weak currencies. They also
Communiqué, March 19-20, 2018.
caution that labeling other countries as currency
Trump Administration Policy Proposals
manipulators could trigger retaliation.
During the 2016 presidential campaign, Donald Trump
If currency manipulation should be addressed, what is
raised currency manipulation, particularly by China, as a
the proper tool or tools? In addition to including
key issue. Since assuming office, President Trump has
provisions in trade agreements and applying countervailing
continued to express concerns about the exchange rate
duties, some analysts have called for “countervailing
policies of other countries. The Trump Administration
interventions” in foreign exchange markets and/or
focused its efforts to address unfair currency practices
addressing currency issues more prominently at the IMF or
through trade negotiations. Most notably, the proposed
WTO. What are the tradeoffs of the different policy
United States-Mexico-Canada Agreement (USMCA)
options? Which most effectively address U.S. concerns?
includes, for the first time in a trade agreement, provisions
on exchange rates, widely viewed as a template for future
For more information, see CRS Report R43242, Debates
trade negotiations.
over Exchange Rates: Overview and Issues for Congress,
by Rebecca M. Nelson.
The Trump Administration has proposed new actions to
counter what it regards as currency manipulation, with
some calling currency conflicts the “next front in the trade
Rebecca M. Nelson, Specialist in International Trade and
war.” In May 2019, the Commerce Department also issued
Finance
a notice of proposed rulemaking to provide regulatory
IF10049
authority to potentially impose countervailing duties on
imports from countries determined by the U.S. government
to be acting to undervalue their currency relative to the U.S.
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Debates over Currency Manipulation
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https://crsreports.congress.gov | IF10049 · VERSION 12 · UPDATED