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Updated December 31, 2020
Exchange Rates and Currency Manipulation
An exchange rate is the price of one currency in terms of
Figure 1. Trade Weighted U.S. Dollar Index
another currency. Exchange rates are some of the most
Major Currencies, Goods (1973=100)
important prices in the global economy: they affect
international trade and financial flows and the value of
every overseas investment.
Policymakers have long expressed concerns that a country
may intentionally weaken the value of its currency in order
to boost exports at the expense of other countries. The
United States has sought to counter so-called currency
manipulation through a variety of policy tools. Currency
manipulation is a controversial concept; there is debate
about if, and if so how, it can be effectively addressed.
Frameworks to Address Currency
Source: Federal Reserve.
Manipulation
The United States continues to pursue coordination on
International Monetary Fund
exchange rate issues in the contemporary versions of these
Concerns about unfair exchange rate practices are rooted in
forums: the G-7 (a small group of advanced economies)
the experiences of the 1930s, when countries repeatedly
and the G-20 (a larger group of major advanced and
devalued their currencies to boost exports in response to
emerging-market economies). G-7 and G-20 statements
widespread high unemployment and negative economic
routinely include exchange rate commitments, such as for
conditions. Competitive devaluations of the 1930s are
market-determined exchange rates and to refrain from
widely viewed as contributing to the Great Depression.
competitive devaluations. Commitments made in the
After World War II, countries created a new international
context of the G-7 and the G-20 are non-binding.
organization—the International Monetary Fund (IMF)—
“Treasury continues to press other economies to uphold
to promote stability in the global monetary system. As part
the exchange rate commitments they have made in the
of joining the IMF, member countries agreed, among other
G-20, the G-7, and the IMF.” Treasury Department,
commitments, to refrain from manipulating their exchange
Macroeconomic and Foreign Exchange Policies of Major Trading
rates to gain an unfair trade advantage. A violator could
Partners of the United States, December 2020.
face loss of IMF funding, suspension of its voting rights at
the IMF, or, ultimately, expulsion from the institution.
1988 Trade Act
In its eight-decade history, the IMF has never publicly
Congress also addressed its concerns during the 1980s
determined a member to be manipulating its currency.
about the exchange rate policies of other countries through
Some analysts argue that it is difficult to establish the
the 1988 Trade Act (P.L. 100-418). This Act requires the
“intent” for an unfair trade advantage under the IMF’s
Treasury Department to analyze and report semiannually on
definition of currency manipulation, and that the
the exchange rate policies of major U.S. trading partners. If
consequences for currency manipulation are too draconian
countries are found to be manipulating their currencies, the
to invoke.
Act requires the Treasury Secretary, in some instances, to
initiate negotiations to eliminate the unfair trade advantage.
Informal Economic Policy Coordination
U.S. concerns about currency manipulation resurfaced
After the legislation was enacted, the Treasury Department
during the 1980s, when the U.S. dollar appreciated against
initially made several designations: Taiwan in 1988, South
other currencies (Figure 1). The United States utilized
Korean in 1988, China in 1992, and Taiwan again in 1992
informal forums for economic coordination to address its
(Figure 2). Designations lasted for a few months to a few
concerns. In 1985, the Group of 5 (G-5, France, West
years. The Treasury Department did not find any country to
Germany, Japan, the United States, and the United
be manipulating its currency for more than two decades
Kingdom) signed the Plaza Accord, in which countries
(1995-2018), although some U.S. policymakers and
agreed to intervene in currency markets to depreciate the
analysts maintained that some countries, particularly China,
U.S. dollar in relation to the Japanese yen and the German
merited such a designation. The Treasury Department
deutsche mark. In 1987, six countries (the G-5, plus
designated China in August 2019 under the terms set out in
Canada) signed the Louvre Accord, in which they agreed
the 1988 Trade Act, as well as Switzerland and Vietnam in
to halt the depreciation of the U.S. dollar through a host of
December 2020.
different policy measures, including taxes, public spending,
and interest rates.
https://crsreports.congress.gov
Exchange Rates and Currency Manipulation
Figure 2. Currency Manipulation Designations under
legislating it due to a variety of concerns, including
the 1988 Trade Act
questions about compatibility with U.S. obligations under
the World Trade Organization (WTO). The United
Steelworkers filed the first antidumping and countervailing
duty petitions under the new rule in May 2020, focusing on
tire imports from South Korea, Taiwan, Thailand, and
Vietnam.
Section 301 Investigation
In October 2020, the U.S. Trade Representative (USTR)
announced a “Section 301” investigation into Vietnam’s
currency practices. Section 301 of the 1974 Trade Act (P.L.
Source: Created by CRS from Treasury Department.
93-618) grants USTR a range of responsibilities and
authorities to investigate trade practices that may violate
2015 Trade Facilitation and Trade Enforcement
U.S. trade agreements or engage in acts that are
Act
“unjustifiable,” “unreasonable,” or “discriminatory” and
Given some Members’ continuing concerns about currency
burden U.S. commerce, and potentially impose trade
manipulation and what they perceived as inaction by the
sanctions. Section 301 was rarely used after the creation of
Treasury Department on currency issues, Congress passed
the WTO in 1995 and an enforceable multilateral dispute
new provisions on currency manipulation in the Trade
resolution mechanism, but the Trump Administration
Facilitation and Trade Enforcement Act of 2015 (P.L.
launched a number of 301 investigations, leading to tariffs
114-125). The Act provides a specific definition of
on imports from China and the EU. The application of
currency manipulation and mandates actions to address
Section 301 to currency issues is unprecedented and
such currency manipulation. Specifically, Treasury is to
controversial.
engage in enhanced bilateral engagement and, if currency
Policy Issues for Congress
manipulation persists longer than a year, enact a number of
remedial actions, such as raising the issue at the IMF and
In the past five years, the United States has significantly
prohibiting procurement contracts with the country in
expanded its policy tools for responding to currency
question. In December 2020, the Treasury Department
manipulation. The executive branch is also, for the first
designated Switzerland and Vietnam for currency
time in decades, actively pursuing allegations of currency
manipulation under the 2015 Trade Facilitation Act, the
manipulation against multiple countries. Questions the 117th
first and only such designations to date.
Congress might consider are as follows.
The United States has deep and liquid foreign exchange
Trade Negotiations and Agreements
and capital markets, and trillions of dollars are exchanged
In 2015, Congress directed the Executive branch to include
for foreign currencies daily. To what extent can other
exchange rate issues in its trade negotiations. Specifically,
countries successfully lower the value of their currency
in 2015, Congress included currency as a principal
relative to the dollar?
negotiating objective in Trade Promotion Authority
Many economic policies can impact exchange rate levels.
legislation (P.L. 114-26). TPA is the authority Congress
Is it possible to differentiate currency manipulation from
grants to the President to enter into certain reciprocal trade
“legitimate” economic policies?
agreements and to have their implementing bills considered
under expedited legislative procedures when certain
Even though U.S. producers generally find it harder to
conditions have been met. The TPA passed in 2015 expires
compete when other countries have weak currencies, U.S.
in July 2021.
consumers generally benefit from less expensive imports.
What are the net effects of currency manipulation on the
Since 2015, Treasury has negotiated currency issues in the
U.S. economy?
context of the United States-Mexico-Canada Agreement
In addition to U.S. commitments on currency at the IMF
(which entered into force in July 2020) and the “Phase
One” trade deal with China
and the G-7/G-20, U.S. laws and regulations contain
(signed in January 2020).
multiple definitions of currency manipulation. Is the
Treasury also negotiated an agreement on exchange rates
United States sending a clear signal to its trading partners
with the other 11 other Trans-Pacific Partnership (TPP)
about what constitutes currency manipulation and what
countries, but it did not enter into force because President
the consequences are?
Trump withdrew the United States from the TPP in 2017.
Does a unilateral approach help the United States gain
Tariffs on Imports from Countries with
traction on currency issues? What are the retaliatory
Undervalued Exchange Rates
risks? Should the IMF play a stronger role in resolving
In 2020, the Commerce Department implemented a
currency disputes?
regulatory change that attempts to counter currency
Are trade agreements an effective tool for addressing
manipulation through tariffs. The regulation allows, in
currency issues? Should currency manipulation be
certain circumstances, tariffs on imports from countries
addressed if Congress renews TPA in 2021?
determined by the Commerce Department, in consultation
with the Treasury Department, to be undervaluing their
Rebecca M. Nelson, Specialist in International Trade and
currency. Various Members of Congress have debated such
Finance
a policy for years, but Congress has refrained from
IF10049
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Exchange Rates and Currency Manipulation
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https://crsreports.congress.gov | IF10049 · VERSION 19 · UPDATED