Selective Criteria: Who’s A “Currency Manipulator”?

Taiwan, Thailand, Vietnam, and Switzerland all meet the U.S. government's criteria for being currency manipulators yet only two of those countries were officially labelled as such.

When the US Treasury Department declared Switzerland a “currency manipulator” last month, it raised some eyebrows. American officials rarely make such accusations publicly, and Switzerland, after all, is not an emerging economy looking for an edge in trade. Au contraire, the Swiss franc is one of the world’s safe-haven currencies. So, what’s going on?

“Currency manipulator” is a rare designation; Treasury has officially applied it only twice in the past 25 years: to China in 1994 and again in 2019. To earn the it, a country must meet three criteria, according to Treasury’s Foreign Exchange Report: 1) a trade surplus with the US that exceeds $20 billion over a 12-month period (Switzerland’s surplus was $49 billion), 2) a current account surplus of at least 2% of GDP over that period (Switzerland: 8.9%), and 3) net purchases of foreign currency equaling at least 2% of GDP over 12 months (Switzerland: 14%).

Because Switzerland and Vietnam met all three criteria, Treasury on December 16 declared them “currency manipulators whose practices hurt American businesses and workers.” Secretary Steven Mnuchin said the US would “follow up” with both countries to change their practices: through bilateral discussions, presumably, and if those fail, with tariffs. Switzerland, for its part, rejected the designation, reserving for itself the right to intervene in currency markets to maintain price stability. An overly strong Swiss franc could hurt exports.

Treasury’s semiannual “Report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners,” mandated by Congress in 1988, became politicized under the Trump Administration, a cudgel applied to recalcitrant trading partners, according to Brown Brothers Harriman’s (BBH) Global Currency Strategy newsletter. BBH did its own analysis using more recent data, including International Monetary Fund forecasts, and confirmed that Switzerland and Vietnam had indeed exceeded all three thresholds. But so did Taiwan and Thailand. Why, then, were they not labelled “manipulators” too?

It is doubtful Switzerland will suffer any real consequences from the designation, some argue, since any penalties would be left to the Biden administration, which is unlikely to make a scapegoat of the Alpine financial hub.

“Simply put, this move was a last gasp move by a lame duck administration,” commented BBH. “Janet Yellen will become Treasury Secretary in a little over a month and we cannot imagine she will take a similar approach.”