Treasury officials stated that they make a positive determination on  currency manipulation only when all the conditions specified in the Trade  Act are satisfied. According to these officials, to reach a positive finding of  currency manipulation under the Trade Act, Treasury must find that the  economies have a material global current account surplus and a significant  bilateral trade surplus with the United States, and they are manipulating  their currency with the intent of gaining trade advantage. Treasury issued its report on March 11, 2005. Treasury did not find that Japan was manipulating its currency in  2003 and 2004. Treasury’s Recent Reporting on China and Japan

In recent reports Treasury has not found that either China or Japan meets  the statutory criteria for currency manipulation. Treasury Has Generally Complied with Reporting Requirements, but Its Approach to Assessing the Impact of Exchange Rates on the U.S. Economy Has Changed

Treasury has generally complied with the reporting requirements mandated  by the 1988 Trade Act (see table 1), although its discussion of U.S.  economic impacts has become less specific over time. Treasury’s impact-related analysis after the 1990’s cited the importance of  broader macroeconomic and structural factors behind global trade  imbalances. Estimates of the Undervaluation of China’s Currency Vary Widely, and Views on Policy Steps Differ

Many experts maintain that China’s currency is significantly undervalued,  while some believe that undervaluation is not substantial or that  calculating reliable estimates is not possible. The significant variation in estimates of remninbi undervaluation can be  attributed in part to different methodological approaches, but similar  methodologies can also yield differences. IV for a discussion of China’s capital controls.) With respect to whether and  when China should change its exchange rate policy, there are varying views  even among experts who believe the currency is undervalued. Analysts have also identified a number of challenges  for China. The U.S. Impact of a Renminbi Revaluation Would Depend on Multiple Factors

A revaluation of the renminbi could have implications for various aspects  of the U.S. economy—with both costs and benefits—although the impacts  are hard to predict. Some key  factors include the following:  How much of the exchange rate appreciation is “passed-through” to  higher prices for U.S. purchasers. Since  then, Members of Congress have continued to propose legislation to  address China currency issues. Treasury also emphasized several aspects of its  exchange rate assessments and its reports. We examined (1)  the process Treasury uses to conduct its assessments of currency  manipulation and the results of recent assessments, particularly with  respect to China and Japan; (2) the extent to which Treasury has met the  1988 Trade Act reporting requirements; (3) experts’ views on whether or by  how much China’s currency is undervalued; and (4) the implications of a  revalued Chinese currency for the United States. (b) Contents of Report—Each report submitted under subsection (a) shall  contain (1) an analysis of currency market developments and the relationship  between the United States dollar and the currencies of our major trade  competitors; (2) an evaluation of the factors in the United States and other economies  that underline conditions in the currency markets, including developments  in bilateral trade and capital flows; (3) a description of currency intervention or other actions undertaken to  adjust the actual exchange rate of the dollar; (4) an assessment of the impact of the exchange rate of the United States  dollar on (A) the ability of the United States to maintain a more appropriate and  sustainable balance in its current account and merchandise trade account; (B) production, employment, and noninflationary growth in the United  States; (C) the international competitive performance of United States industries  and the external indebtedness of the United States; (5) recommendations for any changes necessary in United States economic  policy to attain a more appropriate and sustainable balance in the current  account; (6) the results of negotiations conducted pursuant to section 3004; (7) key issues in United States policies arising from the most recent  consultation requested by the International Monetary Fund under article IV  of the Fund’s Articles of Agreement; and (8) a report on the size and composition of international capital flows, and  the factors contributing to such flows, including, where possible, an  assessment of the impact of such flows on exchange rates and trade flows. Instead, U.S.  imports from other low-wage foreign suppliers would increase.
Why GAO Did This Study

The 1988 Trade Act requires the Department of the Treasury to annually assess whether countries manipulate their currencies for trade advantage and to report semiannually on specific aspects of exchange rate policy. Some observers have been concerned that China and Japan may have maintained undervalued currencies, with adverse U.S. impacts, which has brought increased attention to Treasury's assessments. In 2004, Congress mandated that Treasury provide additional information about currency manipulation assessments, and Treasury issued its report in March 2005. Members of Congress have continued to propose legislation to address China currency issues. We examined (1) Treasury's process for conducting its assessments and recent results, particularly for China and Japan; (2) the extent to which Treasury has met legislative reporting requirements; (3) experts' views on whether or by how much China's currency is undervalued; and (4) the implications of a revaluation of China's currency for the United States. In commenting on a draft of this report, Treasury emphasized it does consider the impact of the exchange rate on the economy, and factors influencing exchange rates also affect U.S. production and competitiveness.

What GAO Found

Treasury has not found currency manipulation under the terms of the 1988 Trade Act since it last cited China in 1994. Treasury officials make a positive finding of currency manipulation only when all the conditions in the Trade Act are satisfied--when an economy has a material global current account surplus and a significant bilateral trade surplus with the United States, and is manipulating its currency with the intent to gain an unfair trade advantage. Treasury said that in its 2003 and 2004 assessments, China did not meet the criteria for manipulation, in part because it did not have a material global current account surplus and had maintained a fixed exchange rate regime through different economic conditions. Japan did not meet the criteria in 2003 and 2004 in part because its exchange rate interventions were considered to be part of a macroeconomic policy to combat deflation. Treasury has generally complied with the reporting requirements for its exchange rate reports, although its discussion of U.S. economic impacts has become less specific over time. Recent reports stress the importance of broad macroeconomic and structural factors behind global trade imbalances, which Treasury officials contend meets the intent of economic impact requirements. Many experts have concluded that China's currency is undervalued, but by widely varying amounts, while some maintain that undervaluation cannot be determined. The significant variation in estimates can be attributed in part to different methodological approaches, but experts also believe that exchange rate assessments are especially challenging for rapidly developing economies such as China's. Among experts who believe China's currency is undervalued, views on policy steps to correct the imbalance differ. A revaluation of China's currency could have implications for various aspects of the U.S. economy, although the impacts are hard to predict. They depend on multiple factors, including how much appreciation is passed through to higher prices for U.S. purchasers and the extent to which reduced imports from China are replaced with imports from other countries. In addition to affecting trade-related sectors, a revaluation could have implications for U.S. capital flows.