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US set to brand Taiwan as currency manipulator even as ties warm

Despite trade and tech tensions, China is expected to be spared from list

U.S Treasury Secretary Janet Yellen, left, and Taiwanese President Tsai Ing-wen. Washington is set to label Taiwan as a currency manipulator in an upcoming report. (Source photos by AP and Reuters) 

NEW YORK -- Growing U.S. support for Taiwan as part of a geopolitical battle with China is not deterring Washington from branding the island as currency manipulator.

Taiwan's addition to the U.S. Treasury Department's list of manipulators in its semi-annual foreign exchange report, expected to be published on Thursday, "appears to be consensus now," according to Francesco Pesole, a forex strategist with Dutch financial services firm ING Group.

In a note Wednesday, ING estimated the Taiwanese central bank's foreign exchange interventions in 2020 amounted to 5.8% of gross domestic product -- way above the 2% threshold set by the U.S. Treasury.

"We thought the Treasury already gave a free pass -- by underestimating [forex] interventions -- to Taiwan in December, possibly due to geopolitical considerations related to China's influence in the region," Pesole wrote, referring to the last report released by former President Donald Trump's administration.

The Taiwan dollar gained 5.6% against the greenback in 2020. But the island's currency fell sharply this week on expectations that it will be branded a manipulator -- falling more than 2% from a peak in early March.

China, despite the trade, tech and geopolitical tensions with the U.S., is set to be spared.

"China is not manipulating its currency so I expect that to be reflected in the report," said David Dollar, a former Treasury official who is now a senior fellow in the John L. Thornton China Center at the Washington think tank Brookings Institution.

The Treasury's new foreign exchange report will be the first under Treasury Secretary Janet Yellen's leadership. At her confirmation hearing in January, Yellen vowed that she would work to fulfill President Joe Biden's promise to "oppose any and all attempts by foreign countries to artificially manipulate currency values to gain an unfair advantage in trade."

Even so, the Biden administration is likely to downplay tensions over exchange-rate policies with trading partners in Asia, due in part to geopolitical considerations, even though some are on the U.S. Treasury's currency manipulator list, Fitch Ratings said in a Wednesday note.

To China's chagrin, the U.S. has rapidly been drawing closer to Taiwan. Just last Friday, the State Department issued new guidelines that will enable American officials to meet more freely with their Taiwanese counterparts, "to encourage U.S. government engagement with Taiwan that reflects our deepening unofficial relationship."

A U.S. delegation, including former Deputy Secretaries of State Richard Armitage and James Steinberg, is currently visiting Taipei.

Last year, Taiwan's central bank started actively buying U.S. dollars following a steep appreciation of the Taiwan dollar.

In December, the Trump administration placed both Taiwan and China on its monitoring list for meeting two out of three criteria for the currency manipulator label -- a goods trade surplus with the U.S. of over $20 billion and an account surplus of more than 2% of GDP over a 12-month period.

The December report pegged Taiwan's intervention at 1.7% of GDP, 0.3 percentage point short of the 2% threshold.

As the new edition of the report looms, Taiwan's central bank has acknowledged the risk of being tagged. Gov. Yang Chin-long told parliament in March that it is "possible" that the U.S. will make such a designation. The last time Taiwan was named in 1992.

But Yang reassured Taiwanese lawmakers that even if Washington went forward with such a move, it would have no immediate impact on Taiwan's economy.

Speaking to parliament, Yang also maintained that Washington's large trade deficit with Taipei should be attributed to demand -- the island is a big producer of semiconductors -- rather than not exchange rates.

"We think the impact on Taiwan's economic growth would be limited because we don't expect the U.S. to impose import tariffs on goods from Taiwan," Oxford Economics write in a note on Thursday. "That would weigh on bilateral relations at a time of rising cross-strait tensions with China and harm U.S. firms that rely on Taiwan's semiconductors."

Taiwan's recent exchange-rate policies have drawn criticism from members of the Biden administration, including Brad Setser, counselor to the U.S. Trade Representative.

In 2019, Setser, then a senior fellow at the Council on Foreign Relations, published a research report alleging that Taiwan hid over $100 billion in reserves and related currency intervention from the U.S. Treasury.

"The case for the U.S. naming Taiwan a currency manipulator under the 1988 act is actually stronger than the case for naming China," Setser wrote in a tweet associated with the report.

Last September, Setser again maintained that there is "an increasingly strong case" for giving Taiwan such a designation, in reaction to a Reuters report that the island is limiting outright currency intervention by blocking forex transactions.

JPMorgan's Asia rates and forex strategy team wrote in a March note that they expect Taiwan's central bank to adopt a more hands-off approach to its currency, as it faces "increasing pressures on both external and domestic fronts."

Japan, South Korea, Singapore, Malaysia, Thailand and India were also on the Treasury's monitoring list last year, while Vietnam was tagged a currency manipulator. ING expects Vietnam's designation to continue while flagging Thailand as at risk of joining its ranks.

But "labeling a country a manipulator is often a less effective lever than the threat of doing so," Mark Sobel, a former senior Treasury official and U.S. chairman of the Official Monetary and Financial Institutions Forum, wrote in a March article.

The U.S. currency manipulator label does not trigger immediate penalties such as tariffs. It requires bilateral engagement on currency policies that can involve the International Monetary Fund. Such a designation, which remained fairly rare up until a few years ago, could also cause swings in foreign exchange markets.

In 2016, Congress enacted legislation to make currency manipulator determinations by a quantitative approach consisting of three metrics, in place of a more qualitative weighing. The Trump administration further adjusted the current account metric to 2% of GDP from 3%, making it easier for economies to cross the threshold.

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