The Basics of America’s “Currency Manipulation” Problem

First, it is necessary to understand what the term “currency manipulation” is?

According to Article IV of the terms of the International Monetary Fund (IMF) agreement of 1978, IMF member countries will “avoid manipulating the exchange rate or the international monetary system in order to effectively prevent balance of payments or to gain an unfair competitive advantage over other members”. But until now, there is still no clear definition in economics of the phrase “unfair competitive advantage”, so this phrase has become an important tool in international trade negotiations, but it is still not a clear definition of the term “unfair competitive advantage”.

multilateral and multilateral.

The U.S. government legislated currency manipulation into a specific act, the Omnibus International Trade and Competition Act, in 1998 to gain the power to impose tariffs on countries.

has a large trade surplus with the United States.

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In this Law, the President of the United States requires the Treasury Department to make a report twice a year on economic policy and international exchange rates, including aspects such as: trade surplus, current account surplus, foreign exchange trading, monetary policy, capital flow control policy, exchange rate operations, foreign exchange accumulation and all other related activities. On the basis of the overview report, the President of the United States can label a country a “currency manipulator” and has the power to expedite negotiations, either directly or through the International Monetary Fund (IMF) to claim require those countries to make reasonable policy adjustments and may introduce measures to “punish” countries identified as currency manipulators, such as imposition of tariffs and trade barriers. commercial. However, the measures can only be applied after at least one year of negotiations.

On the basis of a report, the President of the United States can label a country a “currency manipulator” and the US Treasury Department has the power to set up an investigation team to expedite negotiations directly or indirectly. through the IMF, to demand that these countries eliminate currency manipulation.

In 2015, the Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA) was enacted under President Obama to further specify the criteria for proving a country has “currency manipulation”

behavior.

Thus, it can be affirmed that: “currency manipulation” is a unique and characteristic product of US law that was concretized into a content in the Omnibus International Trade and Competition Law in 1998. The United States imposes currency manipulation on other countries is to protect their international trade from running a deficit in that country’s trade balance, thereby protecting the economy and companies in the country. country.

Pursuant to this Act, when a country is determined to be a currency manipulator, it is not permitted to enter into economic contracts with the United States Government.

So, on what basis does the US base a country as a currency manipulator?

Under the TFTAE Act, if a country meets the following criteria to be considered a currency manipulator, there are 3 specific criteria:

- Bilateral goods trade surplus with the US of 20 billion USD or more;

- Current account surplus equivalent to at least 2% of GDP (previously it was 3%);

- One-way (buying or selling) and prolonged intervention in the foreign currency market, represented by net buying of foreign currencies for at least 6 months over a 12-month period with a total net buying of foreign currencies equivalent to at least 2% GDP over a 12-month period.

The TFTAE Act requires the U.S. Treasury Department to perform advanced analysis of the foreign economic and exchange rate policies of major trading partners that meet the criteria for a bilateral trade surplus with the United States, current account surplus and foreign currency intervention. When a country is identified as a “currency manipulator”, it extends “punishment”

measures to countries identified as currency manipulators such as the imposition of tariffs and the use of trade barriers. However, the measures can only be applied after at least a year of negotiations.

Because there is no clear definition in economics of the term “unfair competitive advantage”.

This issue concerns the relationship between the current account and the spread between investment and savings; the difference between the nominal and real exchange rates; as well as the difference between short- and long-term effects. Therefore, currency manipulation focuses on the real exchange rate, and the real exchange rate can also be influenced by investment demand or savings supply or both.

Current account = Domestic savings - Domestic investment

Thus, any policy that affects either variable (domestic savings or investment) has an impact on the exchange rate and the current account.

In the history of applying the Omnibus International Trade and Competition Act and the Trade Enforcement and Promotion Act, the US Government has labeled many countries “currency manipulators”. Up to now, the US has based on its unilateral report and labeled “currency manipulator” for Korea in 1988, Taiwan (China) for the first time also in 1988 and again in 1992. , China for 3 consecutive years from 1992 to 1994. Notably, in August 2019, China was also labeled a “currency manipulator” but not from any reports. When the January 2020 reporting period was released, China did not violate all three of the above criteria and so the “currency manipulator”

label was also removed. Vietnam and Switzerland at the end of 2020 have also been imposed by the United States as currency manipulators.

However, many international law experts have argued that the grounds presented by the United States for imposing a currency manipulator are not scientifically sound for the following reasons:

First, in theory, the three criteria set forth by the US Treasury Department are not a solid basis for determining whether a country is a currency manipulator. For the United States, the term

“currency manipulation” is used to define a country’s intervention in the foreign exchange rate, reducing the value of its domestic currency relative to the US dollar (nominal or real). ) to boost exports, especially to the United States.

However, so far, there is no international economic-financial theory that can confirm the

“correct exchange rate” between two currencies, as well as the criteria for determining this rate.

According to the simplest theoretical framework for nominal exchange rates, the market rate, for example between VND and USD, is generally determined relative to (i) the prime interest rate in Vietnam; (ii) prime interest rate in the United States; (iii) the long-term monetary policy of both countries. And according to this theoretical framework, with interest rate policy already at a record low and the monetary base more than quadrupled since the 2008-2009 crisis, it seems that it is the United States that wants to do this. weak dollar policy and a tendency to “manipulate currency”.

Besides, if the “real exchange rate” is used as a measure in determining the “currency manipulator country”, the most basic theoretical frameworks of the “real exchange rate” also require a lot of factors. Specific factors of the economy, such as the level of development, average income and the composition of the basket of goods corresponding to the economy are evaluated and studied carefully.

When using indices that simulate “real rates”, such as the “Big Mac” index based on the prices of McDonald’s burgers, an index developed by the Economist, or the Billy Index According

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to Bloomberg, the global index “Chai Latte” by Versus or the official indexes proposed by the IMF

and countries, the “real exchange rate” between currencies often has a large difference. It is very difficult, if not impossible, to value one coin’s true value higher or lower than another.

In other words, the US Treasury Department’s use of the above three criteria to identify a

“currency manipulator” lacks a solid scientific basis and has not entered the essence of the problem.

The logic between the three given criteria and “currency manipulation” is almost non-existent.

Second, from a practical point of view, rightly or wrongly, the US government is only an executive agency and the US Treasury Department makes reports on the basis of strict compliance with domestic laws. This is evident in all previous reports that can be found on the US Treasury Department website. Those responsible for the preparation of the report adhere to a basic outline framework, with unified criteria and a transparent status quo assessment.

With the 3 criteria mentioned, at least within the last 5 years when a country “satisfies” two of the three criteria mentioned above is put on the watch list and when it “satisfies” all three criteria, it is put on the watch list. on the “currency manipulator” list. Although the label “currency manipulation” does not reflect the true meaning of the term, the nature of the act of “labeling” in the report is a purely technical manipulation in this case.

In other words, the fact that Vietnam is on the list of “currency manipulators” in the report at the end of 2020 is not necessarily a less positive signal in the increasingly good diplomatic relations between Vietnam and the United States. , as well as former President Trump’s personal interest in Vietnam.

Thus, judgments and doubts about potential factors related to political conflicts can be excluded when the US “labels” Vietnam as a currency manipulator, but it is only a technical issue.

and purely economic needs to be prioritized to research and solve.