Not that I’m complaining. But seriously, it’s far past the “day one” of the new Administration when Donald Trump promised China would be declared a currency manipulator.

The Treasury’s report was released last week. Treasury uses the following criterion:

Pursuant to Section 701 of the Trade Facilitation and Trade Enforcement Act of 2015, this
section of the Report seeks to identify any major trading partner of the United States that
has: (1) a significant bilateral trade surplus with the United States, (2) a material current
account surplus, and (3) engaged in persistent one-sided intervention in the foreign
exchange market. Section 701 requires data on each major trading partner’s bilateral trade
balance with the United States, its current account balance as a percentage of GDP, the
three-year change in the current account balance as a percentage of GDP, foreign exchange
reserves as a percentage of short-term debt, and foreign exchange reserves as a percentage
of GDP. Data for the most recent four-quarter period (July 2016 to June 2017, unless
otherwise noted) are provided in Table 1 (on p. 15) and Table 2 (below).

These translate to $20 billion bilateral trade surplus with the US, CA surplus of 3% of GDP, and forex intervention of 2% worth of GDP. The table below shows how various countries stack up:

Notice that seven countries pass the bilateral trade balance threshold – but I must confess that this criterion has never made sense to me.

The more plausible CA/GDP threshold is exceeded for Japan, Germany, Korea, Taiwan and… Switzerland. And in terms of magnitude of FX intervention (the measure that most closely matches what the textbook would characterize as “manipulation”, in my opinion), Switzerland and Brazil meet the 2% of GDP threshold. Interestingly, China doesn’t meet either of the latter two thresholds.

Another perspective on misalignment (separate from “manipulation”) is provided by the price criterion. One version of the price criterion is that the exchange rate is at such a level that purchasing power parity is violated, then a currency is misaligned. However, a well known empirical phenomenon is that the price level is lower in lower income countries — the “Penn effect”.