In a report on foreign currencies released by the US Department of the Treasury on Friday, the US again put Taiwan — along with China, Japan, Germany, Switzerland and South Korea — on a monitoring list, citing the nation’s high current account surplus.
The twice-yearly report on international economic and exchange rate policies has been published since April last year. Taiwan has made the US government’s currency watch list for three consecutive reports.
The latest edition said that Taiwan met only one of the three criteria for identifying currency manipulation, namely a large current account surplus exceeding 3 percent of GDP. In the past, Taiwan was also accused of engaging in “persistent, one-sided intervention in foreign exchange markets” over the year.
The report is a formal way for the US government to identify currency manipulators and follow through with punitive measures. This version states that “Taiwan has a track record of asymmetric foreign exchange interventions” and urges the monetary authorities to reserve foreign exchange interventions only to “exceptional circumstances of disorderly market conditions,” with more transparency in foreign exchange operations and reserve management.
This should come as no surprise to Taiwan. As US President Donald Trump told the Wall Street Journal in an interview last week that he no longer deems China — which has the largest trade surplus of any nation against the US — a currency manipulator, there is no reason to think Taiwan would be categorized as such.
However, as long as the US Treasury keeps the three major criteria for currency manipulation unchanged, Taipei will probably permanently feature on Washington’s radar. Taiwan’s current account surplus will remain very sizable, as it results from long-term structural factors and reflects the nation’s small, export-reliant economy.
Taiwan would be thrown into insecurity if the US Treasury were to tighten the benchmarks or change its definition for currency manipulation in future reports, which is not entirely unlikely, considering the Trump administration’s abrupt policy reversals on various issues.
Regardless of whether Taiwan is on the US Treasury’s monitoring list, its trade and currency practices are under scrutiny in the US. The apparent decrease in the central bank’s late-session currency interventions in recent months might show that Taiwan is fearful of being labeled as a currency manipulator.
The central bank needs to adopt a flexible and more delicate mode of dealing with the exchange rate.
In the first quarter, the New Taiwan dollar gained 6 percent against the US dollar, making it Asia’s second-best-performing currency. The report said the NT dollar is undervalued by as much as 26 percent, citing an estimate by the Peterson Institute for International Economics, and Taiwan is still under pressure to allow the NT dollar to further appreciate.
The question is how long the central bank can continue its hands-off stance and if the NT dollar can afford to rise even further without harming the nation’s export competitiveness.
Trump’s administration has several more material options to ensure progress in shrinking other nations’ trade imbalances with the US, such as the use of countervailing tariffs. To forestall unpleasant surprises, Taiwan needs to manage trade relations with the US more actively and develop a strategy to deal with possible moves by Washington.
Although there are some positive effects from a strong NT dollar, such as an increase in purchasing power and cheaper travel abroad for Taiwanese people and businesses, companies should take into account that the currency market might become more volatile due to rising trade protectionism and heightened geopolitical tension.
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