On Tuesday, May 28, the US removed India from a currency watchlist after India took steps to mitigate concerns of currency manipulation. In a letter to Congress, the US Treasury Department said that it has revised its report on its trading partners’ currency practices and found that India and Switzerland should be removed. China has remained on the list.
“India has been removed from the Monitoring List in this Report, having met only one out of three criteria—a significant bilateral surplus with the United States—for two consecutive Reports”, said the Department of Treasury.
Switzerland has been removed for having a material current account surplus with the US.
“Neither Switzerland nor India met the criteria for having engaged in persistent, one-sided intervention in either the October 2018 report or this report. Both Switzerland and India have been removed from the Monitoring List”, clarified the US government.
The Department of Treasury has chosen to keep China, Germany, Italy, Japan, and South Korea on the list and added Ireland, Malaysia, Singapore and Vietnam.
China has not been outrightly branded as a currency manipulator, but does demand “close attention”, said the report.
In China’s case, US Treasury Secretary Steven T. Mnuchin said, “Additionally, Treasury will continue its enhanced bilateral engagement with China regarding exchange rate issues, given that the RMB has fallen against the dollar by eight percent over the last year in the context of an extremely large and widening bilateral trade surplus.”
US President Donald Trump has already taken issue with the US’ trade surplus with China. Both countries have imposed a series of steep tariffs on the other’s trade products, reigniting the US-China trade war.
In 1994, under President Bill Clinton, China was officially tagged a currency manipulator. No country has been slapped with that label since, despite Trump promising to do so.
India on the US currency watchlist
India was placed on the US’ currency watchlist for the first time in 2018. Switzerland, China, Germany, Japan, and South Korea were on the list that year as well.
The Department of Treasury releases its semi-annual report on its 21 trading partners foreign exchange policies, especially unfair currency manipulation.
“The Treasury Department is working vigorously to achieve stronger growth and to ensure that trade expands in a way that helps U.S. workers and firms and protects them from unfair foreign trade practices. Treasury takes seriously any potentially unfair currency practices, and Treasury is expanding the number of U.S. trading partners it reviews to make currency practices fairer and more transparent,” said US Treasury Secretary Steven T. Mnuchin.
In 2018, the US said that India had a $23 billion trade surplus with the US and increased its purchases of foreign exchange even though there was no need to do so because the rupee increased in value.
The Department of Treasury said, “Give that Indian foreign exchange reserves are ample by common metrics, and that India maintains some controls on both inbound and outbound flows of private capital, further reserve accumulation does not appear necessary.”
Countries that engage in currency manipulation have a reputation for making trade relations unfair and skewed towards them. If the US considers any countries to be making serious efforts to manipulate currency, it can impose trade sanctions.
Hence, India being dropped from the list is welcome news from the country.
Why do countries manipulate their currencies?
Although countries are supposed to allow their currencies’ strength to be determined by the floating market value, some have been accused of intentionally manipulating that value.
One of the main reasons countries may do so is to encourage exports and competitiveness because the domestic currency becomes cheaper when compared to other countries’ currencies. This means that the manipulating countries’ exports become cheaper and more affordable overseas, resulting in higher demand.
On the other hand, importing countries’ goods become more expensive and the revenue those countries earn from selling their goods also increases. This helps in correcting the trade deficit of the domestic country, if any, and push an incumbent government’s narrative of economic prosperity.
Governments can engage in currency manipulation by buying more foreign exchange and driving up the value of the currency being bought and selling its own currency and driving down its value.
However, currency manipulation is a slippery slope because countries can begin to engage in trade wars and artificially set foreign exchange rates that trigger inflation, unemployment, loss of confidence in the economy, and soured diplomatic relations.
If left unchecked, countries that devalue their currency can also incur large amounts of debt— a serious problem in developing countries like India.
Rhea Arora is a Staff Writer for Qrius
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