The U.S. Department of the Treasury has added South Korea to its “monitoring list” of trading partners, scrutinizing their foreign exchange practices amid broader concerns regarding currency manipulation and international trade fairness. This latest move comes as part of the Treasury’s semiannual foreign-exchange report, where South Korea joins Japan, Germany, and other major economies under scrutiny for exchange-rate practices. The Treasury also repeated its sharp criticism of China, citing persistent opacity in the Chinese government’s currency management strategies.
Despite the adjustments, the report concluded that none of the major U.S. trading partners had manipulated their currency exchange rates to gain an undue competitive advantage or impede balance of payments adjustments, as defined by U.S. law. This article delves into the latest report, examining its implications for South Korea, the evolving dynamics of the global currency market, and the broader impact of a strengthening dollar on international trade.
The Treasury’s foreign-exchange report, mandated by Congress since 1988, serves as a mechanism to oversee and address currency manipulation and foreign-exchange practices that might disadvantage U.S. trade interests. While the ultimate goal is to promote fair competition, the Treasury’s actions reflect a complex interplay of diplomatic, economic, and trade-related concerns.
Countries placed on the monitoring list meet at least two of three criteria under the 2015 Trade Facilitation and Trade Enforcement Act:
- Significant Trade Surplus with the U.S.: A substantial trade surplus with the United States.
- Material Current Account Surplus: A global current-account surplus that demonstrates net income from foreign trade.
- Frequent, Persistent Unilateral Interventions: Recurrent interventions in foreign exchange markets to manipulate the national currency’s value.
By identifying countries that meet two or more of these criteria, the Treasury aims to pressure governments to modify their foreign-exchange practices, encouraging more market-determined currency valuations.
South Korea’s inclusion in this report marks a significant development, attributed to the country’s sizable global current-account surplus and its bilateral trade surplus with the United States. According to a Treasury spokesperson, these indicators led to South Korea’s placement under “enhanced analysis,” as the United States looks for more transparent and equitable practices in the South Korean won’s valuation.
Following the announcement, the South Korean won depreciated as much as 0.5% during early Friday trading, reflecting market sensitivity to the Treasury’s report. Although South Korean policymakers traditionally emphasize that exchange rates are market-determined, they reserve the right to intervene in cases of excessive volatility through “smoothing operations.” In fact, South Korean authorities issued a public warning in April 2024 when the won experienced significant weakening.
The Korean finance ministry has not issued any formal statement, but analysts note that South Korea’s addition to the list might push its policymakers to enhance disclosure surrounding any future market interventions.
The timing of South Korea’s inclusion on the monitoring list comes as the U.S. dollar continues to rally against global currencies, influenced by shifting expectations around Federal Reserve policy and inflation concerns under President Trump’s economic policies. This dollar appreciation, fueled by high-interest rates and inflationary pressures, has created challenges for major dollar-denominated debt holders and countries heavily reliant on dollar-priced imports, such as oil.
Historically, the Treasury’s currency-monitoring mechanism has served as a warning to countries suspected of undervaluing their currencies to secure trade advantages. However, the current period of dollar strength has seen interventions by foreign governments primarily aimed at stabilizing their local currencies rather than devaluation. The effect of the strong dollar on global trade and economic stability cannot be understated, as it impacts both developed and emerging markets, making this report’s timing particularly significant.
The Treasury’s report once again underscores concerns about China’s lack of transparency in currency management. Beijing’s foreign exchange interventions and overall exchange rate policies remain shrouded in secrecy, making China an outlier among major economies. The Treasury has criticized China’s reluctance to publish relevant foreign exchange data and related policies, which complicates efforts to understand and address potential manipulation.
While the Treasury refrained from labeling China as a manipulator in this report, it emphasized that China’s opaque practices justify ongoing scrutiny. This stance follows a history of contentious U.S.-China relations over trade and currency issues, notably during the Trump administration. In 2019, the Treasury designated China as a currency manipulator amid trade tensions, a designation lifted five months later as trade negotiations progressed.
Despite China’s significant trade surplus with the United States and concerns about the yuan’s valuation, labeling China a manipulator has far-reaching diplomatic and economic implications, which likely influenced the Treasury’s decision to focus on monitoring rather than formal designation.
The Treasury Department’s power to designate countries as currency manipulators carries political weight but does not trigger immediate penalties. Instead, the designation opens the door for negotiations, allowing the U.S. to press for adjustments to foreign exchange practices deemed unfair. If issues persist, the United States can escalate with penalties such as exclusion from government contracts.
The last time the U.S. designated a currency manipulator was in 2019, under former President Donald Trump, when China received the label. This designation came as trade relations deteriorated during the height of the U.S.-China trade war. Although the designation was removed after a brief period, it set a precedent for using the “manipulator” label as a negotiating tool rather than a purely economic measure.
The Treasury’s latest report covers the four quarters through June 2024, maintaining most of the previous members on the monitoring list.
- Japan: Notable for its high levels of currency interventions and ongoing trade surplus with the U.S.
- Germany: An export powerhouse with a persistent current account surplus.
- Singapore, Taiwan, and Vietnam: Countries often scrutinized for their export-driven economies and currency management practices.
- China: Included despite its lack of compliance with transparency standards.
Notably, Malaysia was removed from the list in this latest report, reflecting potential shifts in its trade or exchange rate practices.
Each of these countries has faced similar scrutiny in the past, but their economic policies and trade practices remain under watch due to ongoing issues with market-driven currency valuation. This prolonged presence on the list indicates that the Treasury’s expectations for increased transparency and market-determined currency values remain a top priority in U.S. international economic policy.
The Treasury’s report underscores the Biden administration’s efforts to foster fair international trade by addressing currency manipulation concerns, even as the U.S. dollar remains strong. By highlighting the practices of countries on the monitoring list, the Treasury aims to level the playing field for American businesses and protect the U.S. economy from potential disadvantages in global markets.
As the dollar strengthens, U.S. exporters may find it more difficult to compete internationally, which adds complexity to the Treasury’s goals of promoting fairness while mitigating inflation and supporting a strong domestic economy. The Biden administration is likely to continue leveraging the monitoring list as part of its strategy to ensure a balanced global trade environment without resorting to punitive designations that could provoke retaliatory measures.
