On April 14, the US Department of the Treasury released its Foreign Exchange Policies of Major Trading Partners of the United States report, which revealed that Taiwan still occupies a place on its “currency monitoring list.”
Washington uses three assessment criteria to help create the list: a significant bilateral trade surplus; a material current-account surplus; and persistent, one-sided intervention, where net purchases of foreign currency are conducted repeatedly and total at least 2 percent of GDP over a 12-month period.
Objectively speaking, the criteria are not very exact. The first two might be caused by a nation that has a competitive advantage unrelated to the exchange rate, while the third — purchases of foreign currency — might be used by a government or central bank to counter the threat to its currency caused by hot money.
Taiwan was put on the list because it maintains a current-account deficit of more than 3 percent. This means that Washington suspects that currency manipulation might be at play, but it is not sure. There are three pieces of evidence that would help show that Taiwan is not an exchange-rate manipulator.
First, consider the effect Taiwan manipulating its currency would have. A lowering of the exchange rate would cause inflation to increase. If Taiwan was manipulating its currency over the long term, one would expect to see serious levels of inflation. Although in the short term, other factors can sometimes distort the picture, viewed over the long term, Taiwan should have experienced rising inflation. However, as is well known, the nation has one of the world’s lowest rates of inflation.
How can Taiwan be engaging in serious exchange-rate manipulation while having one of the lowest rates of inflation? Although the central bank operates in mysterious ways, even it would have trouble pulling this one off.
From 2000 to last year, the average rate of inflation was 0.98 percent. By comparison, over the same period, inflation in South Korea averaged 2.72 percent. Therefore, when compared with the average inflation in South Korea and the vast majority of other countries, Taiwan cannot be considered a currency manipulator.
Another indicator is interest rates. It is possible for a nation to manipulate its exchange rate by manipulating interest rates: Lowering interest rates will result in a lower exchange rate. Even if a government or central bank does not use interest rates to manipulate its currency, but does so by other means, if the action is not accompanied by low interest rates, it will ultimately be unsuccessful.
Therefore, it is important for a country that wishes to manipulate its currency to maintain interest rates that are lower than that of other countries.
The central bank has a base interest rate that is higher than in the US, Japan, South Korea and the main EU members, while it purchases foreign currency from countries with relatively high interest rates.
Given this, how is it possible for Taiwan to maintain low interest rates? In fact, if the central bank maintains relatively high interest rates, this demonstrates that it is more concerned about keeping inflation in check than it is about maintaining low interest rates.
An additional, indirect piece of evidence is the stagnation of salaries in Taiwan. A low exchange rate will lead to an increase in commodity prices, which in turn will place increased pressure on salaries. This is also the reason inflation is used to justify increased salaries.
All else being equal, a country that maintains a low exchange rate is highly likely to experience salary increases. If Taiwan was an exchange-rate manipulator, it is fairly likely that there would be some evidence of salary increases.
Quite to the contrary, Taiwan suffers from a long-term problem of low salaries, which by extension makes it highly unlikely that it is manipulating the exchange rate.
This evidence indicates that Taiwan is not engaging in exchange-rate manipulation. In fact, when viewed over the long term, the New Taiwan dollar’s exchange rate has actually risen.
Since the end of the 1980s, the NT dollar has appreciated from NT$40 against the US dollar to a high of NT$25.5; an increase of more than 35 percent. A stronger NT dollar increases the buying power of the currency, so that every one NT dollar can be used to purchase substantially more commodities. This increased purchasing power has suppressed the need for salary increases.
As Taiwan does not have any of the symptoms of exchange-rate manipulation, it cannot be considered a currency manipulator. As for its current-account deficit, which exceeds the US standard, this simply demonstrates the relative competitiveness of its products and has nothing to do with exchange-rate manipulation.
Chao Wen-heng is an associate research fellow at the Taiwan Institute of Economic Research.
Translated by Edward Jones
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