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May 2, 2016

Are U.S. Trading Partners Manipulating Currency Rates? An MSCI-Supported Law Helps Find Out

Under the Trade Facilitation and Enforcement Act (TFEA) of 2016, a bill MSCI supported that Congress passed and President Barack Obama signed earlier this year, the White House is required to report to Congress on the currency policies of several countries, including China, Germany, Japan, South Korea, and Taiwan. 

As The Hill explained, “The aim [of this report] is to determine whether a country is lowering the value of their currencies that would provide them an unfair global trading advantage that makes U.S. exports more expensive overseas.” The law sets out three criteria to make that assessment:

  • Whether a country has a significant bilateral trade surplus with the United States;
  • Whether a country has a material current account surplus with the rest of the world; and
  • Whether a country has engaged in persistent one-sided intervention in the foreign exchange market.

Last week, the U.S. Treasury Department issued its first report to Congress under the TFEA’s requirement. According to the department, while none of the five countries listed above “met the standard” set out in the TFEA to be labeled as currency manipulators, all five countries met two of the three criteria, which means the Treasury Department will “closely watch and assess” these nations’ currency practices. 

The Treasury Department praised the TFEA and noted it is working. It said, “These new tools significantly enhance Treasury’s ability to undertake a data-driven, objective analysis of a country’s foreign exchange policies and their impact on bilateral trade with the United States and the broader multilateral trade position.” 

U.S. House Ways and Means Chairman Kevin Brady (R-TX) also praised the law. He argued, “The new customs law requires the president to take action on currency manipulation. By mandating, for the first time, that the president undertake robust analysis and strong action with respect to currency manipulators, Congress has made it clear that such behavior is unacceptable because it hurts American businesses and employees.”