Spoiler alert: for the 36th time running, the U.S. Treasury has concluded that none of its major trading partners are driving down the value of their currencies.
The Chinese yuan is “below its appropriate medium-term valuation” and Korea’s won is “undervalued,” but neither is manipulating its currency, according to the latest biannual report released Monday. Japan’s yen is... well, it’s not really clear what the Treasury thinks on that one. Read it for yourself.
Switzerland, the only country named as intervening in foreign-exchange markets to weaken its currency, is given a pass on the basis that it’s home to a lot of banks and commodity traders.
The bill requiring this report was signed into law in 1988, at a time the Berlin Wall still stood and “Nightmare on Elm Street 4” was leading the U.S. box office. The Treasury hasn’t designated any country a manipulator since China in 1994.
It’s not just the antiquity of the thing that makes it out of date. The world that gave birth to this report is one where emerging economies were devaluing to pump up exports to the U.S. Right now, they face the opposite problem: With China’s commodities appetite declining and the U.S. moving toward raising interest rates, many central banks have been intervening to support rather than depreciate their currencies, as the report notes.
Meanwhile, the U.S. current account deficit is smaller than when Ronald Reagan signed the original law:
Figuring out what’s causing global imbalances is hard work. Under Hank Paulson, the Treasury showed a degree of snippiness about the weak yuan in some of its currency reports in the mid-2000s, while stopping just short of labeling China a manipulator. Privately, Paulson thought the situation more a result of Americans’ spendthrift ways than Chinese nefariousness, according to his 2010 memoir “On the Brink.” Now try throwing questions of motive into that quagmire: It’s not surprising the result looks more politics than economics.
While the attention of headline writers and presidential candidates will focus on the U.S.’s biggest Asian trading partners, China and Japan, they don’t look like the biggest culprits on the numbers. Based on the IMF’s estimates, Germany and Russia are running bigger current account surpluses. Even Italy, a euro member like Germany, has a current account surplus that’s only slightly smaller than China’s:
Right now, Mexico, Brazil, China and Korea are all intervening in the foreign-exchange markets to prop up, not weaken, their currencies. China alone has sold $229 billion of foreign assets since July to support the yuan, according to the Treasury report -- hardly consistent with a program to keep exports cheap.
If there’s ever been a time to retire this relic, it’s now.