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Updated September 22, 2022
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), 1973-2019
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 G7 (a small group of advanced economies) and
the experiences of the 1930s, when countries repeatedly
the G20 (a larger group of major advanced and emerging-
devalued their currencies to boost exports in response to
market economies). G7 and G20 statements routinely
widespread high unemployment and negative economic
include exchange rate commitments, such as for market-
conditions. Competitive devaluations of the 1930s are
determined exchange rates and to refrain from competitive
widely viewed as contributing to the Great Depression.
devaluations. Commitments made in the context of the G7
After World War II, countries created a new international
and the G20 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
G20, the G7, 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, June 2022.
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 (G5, 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 G5, plus Canada)
designated China in August 2019 under the terms set out in
signed the Louvre Accord, in which they agreed to halt the
the 1988 Trade Act, and the designation was lifted as part
depreciation of the U.S. dollar through a host of different
of the “Phase One” trade deal with China in 2020.
policy measures, including taxes, public spending, and
Switzerland and Vietnam were designated in December
interest rates.
2020, and designations were lifted in 2021.
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Exchange Rates and Currency Manipulation
Figure 2. Currency Manipulation Designations
announced its first affirmative finding regarding a currency-
related subsidy involving tires from Vietnam, and imposed
a countervailing duty rate of 6.46%.
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.
93-618) grants USTR a range of responsibilities and
authorities to investigate trade practices that may violate
Source: Created by CRS from Treasury Department.
U.S. trade agreements or engage in acts that are
“unjustifiable,” “unreasonable,” or “discriminatory” and
2015 Trade Facilitation and Trade Enforcement
burden U.S. commerce, and potentially impose trade
Act
sanctions. The application of Section 301 to currency issues
Given some Members’ continuing concerns about currency
is unprecedented and controversial. In January 2021, USTR
manipulation and what they perceived as inaction by the
determined that Vietnam had taken “unreasonable” actions
Treasury Department on currency issues, Congress passed
to push down the value of its currency, but did not impose
new provisions on currency manipulation in the Trade
retaliatory tariffs. In July 2021, Vietnam’s central bank, in a
Facilitation and Trade Enforcement Act of 2015 (P.L.
joint statement with U.S. Treasury Secretary Janet Yellen,
114-125). The Act provides a specific definition of
pledged not to manipulate the currency to gain an unfair
currency manipulation and mandates actions to address
advantage, and USTR subsequently terminated the Section
such currency manipulation. Specifically, Treasury is to
301 investigation.
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
Since 2015, the United States has significantly expanded its
prohibiting procurement contracts with the country in
policy tools for responding to currency manipulation and,
question. The Treasury Department has designated
for the first time in decades, actively pursued allegations of
Switzerland, Taiwan, and Vietnam for currency
currency manipulation against multiple countries. Questions
manipulation under the 2015 Trade Facilitation Act at
Congress might consider are as follows.
various points (Figure 2).
The United States has deep and liquid foreign exchange
and capital markets, and trillions of dollars are exchanged
Trade Negotiations and Agreements
for foreign currencies daily. To what extent can other
In 2015, Congress directed the Executive branch to include
countries successfully lower the value of their currency
exchange rate issues in its trade negotiations. Specifically,
relative to the dollar?
in 2015, Congress included currency as a principal
Many economic policies can impact exchange rate levels.
negotiating objective in Trade Promotion Authority
Is it possible to differentiate currency manipulation from
legislation (P.L. 114-26). TPA is the authority Congress
“legitimate” economic policies?
grants to the President to enter into certain reciprocal trade
agreements and to have their implementing bills considered
Even though U.S. producers generally find it harder to
under expedited legislative procedures when certain
compete when other countries have weak currencies, U.S.
conditions have been met. The TPA expired 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 and G20, 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?
determined by the Commerce Department, in consultation
How does the dollar’s appreciation since mid-2021
with the Treasury Department, to be undervaluing their
impact debates about currency manipulation?
currency. Various Members of Congress had debated such a
policy for years, but Congress has refrained from legislating
Rebecca M. Nelson, Specialist in International Trade and
it due to a variety of concerns, including questions about
Finance
compatibility with U.S. obligations under the World Trade
Organization (WTO). In 2021, the Commerce Department
IF10049
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Exchange Rates and Currency Manipulation
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https://crsreports.congress.gov | IF10049 · VERSION 20 · UPDATED