R E P O R T T O C O N G R E S S

FOREIGN EXCHANGE POLICIES

 OF MAJOR TRADING PARTNERS OF

THE UNITED STATES

U.S. DEPARTMENT OF THE TREASURY

OFFICE OF INTERNATIONAL AFFAIRS

April 29, 2016
Contents

EXECUTIVE SUMMARY ........................................................................................1

SECTION 1: GLOBAL ECONOMIC AND EXTERNAL DEVELOPMENTS.......................8

U.S. DOMESTIC ECONOMIC TRENDS ............................................................................ 9

U.S. EXTERNAL TRENDS .......................................................................................... 11

INTERNATIONAL ECONOMIC TRENDS .......................................................................... 13

SECTION 2: INTENSIFIED EVALUATION OF MAJOR TRADING PARTNERS ............27

KEY CRITERIA........................................................................................................ 27

SUMMARY OF FINDINGS .......................................................................................... 29

SECTION 3: NEW ASSESSMENT FACTORS FOR ENHANCED ANALYSIS.................32

GLOSSARY OF KEY TERMS IN THE REPORT.........................................................36

This Report reviews developments in international economic and exchange rate policies and is 

submitted pursuant to the Omnibus Trade and Competitiveness Act of 1988, 22 U.S.C. § 5305, 

and Section 701 of the Trade Facilitation and Trade Enforcement Act of 2015, 19 U.S.C. § 4421.

1

 

1

The Treasury Department has consulted with the Board of Governors of the Federal Reserve System and 

International Monetary Fund management and staff in preparing this Report.
1

Executive Summary

This Report is the first to implement the intensified evaluation provisions of the 

Trade Facilitation and Trade Enforcement Act of 2015 (the “Act”). The

provisions of the Act provide the United States with valuable new reporting and 

monitoring tools, as well as new measures to address unfair currency practices. 

The Act establishes a process to monitor key indicators related to foreign 

exchange operations, engage economies that may be pursuing unfair practices, 

and impose meaningful penalties on economies that fail to adopt appropriate 

policies. The legislation accomplishes these important goals in a way that is 

consistent with our international obligations.

The new reporting and monitoring tools designed under the Act significantly 

enhance Treasury’s ability to undertake a data-driven, objective analysis of an

economy’s foreign exchange policies and their impact on bilateral trade with the 

United States and the broader multilateral trade position. The Act sets up a 

process in which Treasury delineates clear, objective criteria -- based on relevant 

economic indicators -- to determine whether an economy may be pursuing 

foreign exchange policies that could give it an unfair competitive advantage 

against the United States. 

The Act requires that Treasury undertake an enhanced analysis of exchange rates 

and externally-oriented policies for each major trading partner 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. Drawing on economic research and our own analysis of 

the data, Treasury has determined the thresholds for these criteria as follows (see 

Section 3 for details): 

1) An economy has a significant trade surplus with the United States if its 

bilateral trade surplus is larger than $20 billion (roughly 0.1 percent of U.S. 

GDP) which captures around 80 percent of the value of all trade surpluses 

with the United States last year. 

2) An economy has a material current account surplus if its surplus is larger 

than 3.0 percent of that economy’s GDP. 
2

3) An economy has engaged in persistent one-sided intervention in the 

foreign exchange market if it has conducted repeated net purchases of 

foreign currency that amount to more than 2 percent of its GDP over the 

year. 

In determining the appropriate factors to assess these criteria, Treasury took a 

thorough approach, analyzing data spanning 15 years across dozens of 

economies, including all economies that have had a trade surplus with the United 

States during that period, and which in the aggregate represent about 80 percent 

of global GDP. The thresholds are relatively robust in that reasonable changes to 

the thresholds do not materially change the Report’s conclusions. Treasury will 

also continue to review the factors it uses to assess these criteria to ensure that 

the new reporting and monitoring tools provided under the Act meet the 

objective of indicating where unfair currency practices may be emerging. 

Pursuant to the Act, Treasury finds that no economy currently satisfies all three 

criteria, however, five major trading partners of the United States met two of 

the three criteria for enhanced analysis. Treasury is creating a new “Monitoring 

List” that includes these economies: China, Japan, Korea, Taiwan, and 

Germany. China, Japan, Germany, and Korea are identified as a result of a 

material current account surplus combined with a significant bilateral trade 

surplus with the United States. Taiwan is identified as a result of its material 

current account surplus and its persistent, one-sided intervention in foreign 

exchange markets. Treasury will closely monitor and assess the economic 

trends and foreign exchange policies of these economies.

The provisions in this bipartisan legislation are an important complement to the 

Administration’s ongoing efforts to better protect American workers and firms. If 

an economy meets all three criteria, the President, through the Secretary of the 

Treasury, is required to commence enhanced bilateral engagement with that 

country. If, one year after the start of enhanced bilateral engagement, the 

Secretary determines that the country has failed to adopt appropriate policies to 

correct its undervaluation and external surpluses, the President is required to 

take one or more of the following actions: (1) denying access to OPIC financing; 

(2) excluding the country from U.S. government procurement; (3) calling for 

heightened IMF surveillance; and (4) instructing the United States Trade 

Representative to take into account such failure to adopt appropriate policies in 
3

assessing whether to enter into a trade agreement or initiate or participate in 

trade agreement negotiations. The President may waive the remedial action

requirement under specified circumstances. 

The State of the Global Economy 

Underpinned by robust job creation and resilient domestic demand, the U.S. 

economy grew at a solid pace of 2.4 percent in 2015. Outside of the United 

States, growth in other advanced economies was more disappointing and 

emerging market economies are facing significant headwinds from low 

commodity prices, weak trade growth, and internal cyclical dynamics. Most 

projections for 2016 point to the continuation of modest growth. Growth in

Europe also has picked up, albeit from a very low level, but demand in many parts 

of Europe remains tepid. Demand also remains weak in Japan, with consumption 

especially hit hard following the April 2014 hike in the consumption tax. 

Demand has also been weaker than usual in many emerging market economies, 

most notably in China, where a necessary but difficult transition is taking place 

from investment and export-led growth to consumer-led growth. Concern that 

growth is decelerating in emerging markets has resulted in large capital outflows

from these economies and downward pressure on their currencies. The relative 

strength of the U.S. economy has pushed the dollar stronger against many 

currencies and on a trade-weighted basis over the past year and a half. The 

related softness in foreign demand has exerted a drag on U.S. growth. Many 

emerging market central banks have intervened in currency markets over the past 

year to prevent their currencies from depreciating even further against the U.S. 

dollar, and this has led to a sharp reduction in global foreign exchange reserves.

Financial markets were unusually volatile in the context of the change in China’s 

exchange rate policy last August, and uncertain growth prospects in China, with 

falling oil prices amplifying some of the market volatility. 

The lower price of oil has had a large impact on the redistribution of current 

account balances globally. Oil importing economies have benefitted, and in some 

cases—China, Germany, Taiwan, and Korea—have seen their already large 

external surpluses become even larger, while some oil exporting countries have 

encountered serious financial challenges. 
4

More support is needed globally to bolster global demand and help stabilize 

growth expectations. The Administration has strongly advocated, bilaterally and 

multilaterally, that economies should use all available policy tools to boost 

demand. In February 2016 and again in April, the G-20 Finance Ministers and 

Central Bank Governors endorsed this view, stating that G-20 countries “will use 

all policy tools—monetary, fiscal and structural—individually and collectively” to 

foster confidence and preserve and strengthen the recovery. 

Global growth is being held back by (1) still-high private sector leverage in some 

economies, (2) inadequate macroeconomic support, and (3) sluggish lending 

growth in some economies. Weak investment is often cited as a contributing 

factor to subdued global growth, but investment tends to follow, rather than lead 

GDP growth in the first instance. Still, policies to lift private investment as well as 

public investment could help spur global demand. Trade growth also has 

decelerated. More policy action is needed globally to strengthen demand. 

Monetary policy responses have been forceful in general, but they need to be 

supported with additional fiscal actions to deliver a stronger boost to domestic 

demand. Exceptionally low long-term interest rates provide governments with 

more fiscal breathing room than under historically normal circumstances. 

Increased infrastructure investment could be especially powerful, as it would 

boost near-term demand while also strengthening potential growth in the longerterm. And there are a number of advanced and emerging market economies with 

large external surpluses, including Germany, China, Korea, and Taiwan, that could 

bolster domestic demand and contribute both to stronger global growth and a 

more balanced global economy. 

Treasury Assessments of Major Trading Partners 

As noted above, Treasury is creating a new “Monitoring List” that cites major 

trading partners that have met two of the three criteria specified in the Act. In 

this first Report, the Monitoring List includes China, Japan, Korea, Taiwan, and

Germany. Regarding these economies: 

 China has both a significant bilateral trade surplus with the United States and a 

material current account surplus. China has intervened heavily in the foreign 

exchange markets in recent months to support the RMB, after strong 

downward market pressure triggered by a surprise change in China’s foreign 
5

exchange policy last August. Such a depreciation would have had negative 

consequences for the Chinese and global economies. More clarity over 

exchange rate goals, and that devaluation will not be used to support growth,

would help stabilize the market. Treasury estimates that from August 2015 

through March 2016, China sold more than $480 billion in foreign currency 

assets to support the value of the RMB. At the same time, China has a very 

large and growing bilateral goods trade surplus with the United States. This 

underscores the need for further implementation of structural reforms to

rebalance the Chinese economy to household consumption, and for 

consumption-friendly fiscal stimulus to support demand. 

 Japan has a significant bilateral trade surplus with the United States and a 

material current account surplus. Japan has not intervened in the foreign 

exchange market in over four years. Given Japan’s fragile growth outlook, it is 

increasingly important that the authorities use all policy levers, including a 

flexible fiscal policy and an ambitious structural reform agenda, to lift nearterm growth. Treasury assesses that current conditions in the dollar-yen 

foreign exchange market are orderly, and reiterates the importance of all 

countries adhering to their G-20 and G-7 commitments regarding exchange 

rate policies. 

 Korea has a significant bilateral trade surplus with the United States and a 

material current account surplus. Treasury estimates that during the second 

half of 2015 through March 2016, the Korean authorities intervened to resist 

depreciation of the won during periods of financial market turbulence, selling 

an estimated $26 billion in foreign exchange, including activity in the forward 

and swaps market. This represented a shift from several years of asymmetric 

intervention to resist appreciation. Appreciation of the won over the mediumterm would help Korea reorient its economy away from its current reliance on 

exports by encouraging the reallocation of resources to the non-tradables 

sector. Treasury has urged Korea to limit its foreign exchange intervention 

only to circumstances of disorderly market conditions. In addition, we 

encourage the Korean authorities to increase the transparency of their foreign 

exchange operations and take further steps to support domestic demand. 

 Taiwan has a material current account surplus and, per Treasury estimates, has 

engaged in persistent net foreign currency purchases through most of 2015. In 
6

light of Taiwan’s large current account surplus, such interventions are 

concerning. Taiwan’s bilateral trade surplus with the United States, however, 

was not significant at less than $15 billion in 2015, and thus Taiwan did not 

meet all three criteria the Act establishes to advance to enhanced analysis and 

engagement. Nonetheless, the authorities should limit foreign exchange 

interventions to the exceptional circumstances of disorderly market 

conditions, as well as increase the transparency of reserve holdings and 

foreign exchange market intervention.

 Germany has both a significant bilateral trade surplus with the United States 

and a material current account surplus. Germany’s 2015 current account 

surplus, at almost $290 billion, accounted for the bulk of the euro area’s 

surplus, and pushed the surplus of the euro zone to over 3 percent of GDP. 

The European Central Bank (ECB) has not intervened in foreign currency 

markets since 2011, and did so then as part of a G-7 concerted intervention to 

stabilize the yen following Japan’s earthquake and tsunami2. Nonetheless, 

Germany has the second largest current account surplus globally. This 

represents substantial excess saving—more than 8 percent of GDP—that 

could, at least in part, be used to support German domestic demand, while 

reducing the current account surplus and contributing markedly to euro-area 

and global rebalancing. In Treasury’s view, Germany has adequate policy 

space to provide additional support to demand.

While no economy met all three of the criteria, this result is a reflection, in part, 

of the dynamics of the global economy during the past year, in which capital 

outflows from emerging markets have led a number of economies to engage in 

foreign exchange intervention to resist further depreciation of their currency 

(rather than appreciation). The extent of these flows was unusually high by 

historical standards, which underscores the possibility that more economies may 

trigger these thresholds going forward. 

Based on the analysis in this Report, Treasury has also concluded that no major 

trading partner of the United States met the standard of manipulating the rate of 

exchange between its currency and the United States dollar for purposes of 

preventing effective balance of payments adjustments or gaining unfair 

 

2

For the purposes of Section 701 of the Act, policies of the ECB, which holds responsibility for monetary policy for 

the euro area, will be assessed as the monetary authority of individual euro area countries. 
7

competitive advantage in international trade during the period covered in the 

Report.

3

 

The Administration shares strongly the objective of taking aggressive and 

effective actions to ensure a level playing field for our workers and companies. 

The President has been clear that no economy should grow its exports based on a 

persistently undervalued exchange rate, and Treasury has been working 

aggressively to address exchange rate issues bilaterally, including through the 

U.S.-China Strategic and Economic Dialogue, and multilaterally through the G-7, 

G-20, and the International Monetary Fund. 

This strategy has produced results. The United States has secured commitments 

from the G-20 member countries to move more rapidly to more marketdetermined exchange rates, avoid persistent exchange rate misalignments, refrain 

from competitive exchange rate devaluations, and not target exchange rates for 

competitive purposes. Through Treasury’s leadership, the G-7 member countries, 

including Japan, have publicly affirmed that their fiscal and monetary policies will 

be oriented toward domestic objectives using domestic instruments. Treasury 

has also pushed for stronger IMF surveillance of the exchange rate policy 

obligations of its members. The IMF now publishes an exchange rate assessment 

for 29 economies, and is improving its exchange rate analysis in its Article IV 

reports on member countries. And through U.S. leadership, the Trans-Pacific 

Partnership countries have adopted—for the first time in the context of a trade 

agreement—provisions that address unfair currency practices by explicitly 

adopting G-20 exchange rate commitments and by promoting transparency and 

accountability.

Treasury will continue to closely monitor adherence to all G-7, G-20, and IMF 

exchange rate commitments. These include the G-7 commitments to orient fiscal 

and monetary policies towards domestic objectives using domestic instruments 

and to not target exchange rates, and the G-20 commitments to avoid persistent 

exchange rate misalignments and to not target exchange rates for competitive 

purposes. It also includes G-7 and G-20 commitments to consult closely on 

exchange market issues. 

 

3

As defined by Section 3004 of the Omnibus Trade and Competitiveness Act of 1988. 
8

Treasury will also continue to review the factors it uses to assess whether an 

economy 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, to ensure these new reporting and 

monitoring tools meet their objective of indicating where unfair currency 

practices may be emerging. 

Section 1: Global Economic and External Developments

Context 

The Omnibus Trade and Competitiveness Act of 1988 and the Trade Facilitation 

and Trade Enforcement Act of 2015 (the “Act”) require the Secretary of the 

Treasury to provide semiannual reports to Congress on the international

economic and exchange rate policies of the major trading partners of the

United States. Taken together, these acts require that the Report consider 

whether any major trading partner has met all of the three following criteria: (1) a 

significant bilateral trade surplus with the United States; (2) a material current 

account surplus; and (3) persistent one-sided intervention in the foreign exchange 

market, as indicated by the assessment factors described in Section 3 of this 

Report, and “whether countries manipulate the rate of exchange between their

currency and the United States dollar for purposes of preventing effective 

balance of payments adjustments or gaining unfair competitive advantage in

international trade.”

This Report assesses our major trading partners on the criteria used to determine 

whether an economy should receive enhanced analysis under the Act.

4

 This 

Report also reviews the macroeconomic and exchange rate policies of a dozen of 

the largest trading partners of the United States,5accounting for around 

70 percent of U.S. foreign trade, and assesses global economic developments 

more broadly. This Report covers developments in the second half of 2015, and 

where pertinent and available, data through end-March 2016, in order to assess 

whether economies manipulate the rate of exchange between their currency

 

4

The assessment is based on data covering the 12 months of 2015. 

5

Excluding major oil exporters.
9

and the U.S. dollar for purposes of preventing effective balance of payments

adjustments or gaining unfair competitive advantage in international trade. 

U.S. Domestic Economic Trends

In the first quarter of 2016 consumer spending growth slowed, and business fixed 

investment, inventory investment and net exports all subtracted from growth. 

Residential construction, however, was very strong and government spending 

added to overall growth. Economic growth can be variable from quarter to 

quarter, with each year showing both stronger quarters and weaker quarters. 

Notwithstanding the tepid pace of growth in the first quarter, the underlying 

strength of the U.S. economy remains intact. Job growth has remained strong, 

and the unemployment rate is close to its lowest level in more than seven years. 

The Near-Term Outlook for the U.S. Economy Is Favorable

Although developments abroad are acting as a headwind and the level of 

inventories looks to be excessive, the U.S. economy is in a strong position to meet 

these challenges. Private forecasts point to a rebound in GDP growth in Q2 to 

more than 2 percent and expect that stronger pace to continue for the second 

half of the year, led by healthy growth of consumer spending, further recovery in 

the housing sector, and a small boost from government spending.

Fiscal Headwinds Have Diminished

The rapid pace of fiscal consolidation in recent years has weighed on economic 

activity in the United States, but it has moderated recently and, in the second half 

of 2015, federal government spending contributed 0.1 percentage point to GDP 

growth. State and local outlays contributed a similar amount to growth in the 

second half of 2015. For the entire year, federal outlays were essentially neutral 

for growth while state and local spending provided a small boost to the economy. 

Looking ahead, federal government spending is expected to make a positive 

contribution to GDP in 2016, and continued improvement in state and local 

government finances has laid the groundwork for that sector to be a small net 

positive for growth once again this year. 
10

The Near-Term Outlook for the U.S. Economy Is Favorable

Although developments abroad are acting as a headwind, the U.S. economy is in a 

strong position to meet external challenges. The current outlook suggests that 

real GDP will expand at a solid pace through the end of 2016, led by healthy 

growth of consumer spending, further recovery in the housing sector, and a small 

boost from government spending. A consensus of private forecasters predicts 

that after a weak first quarter, growth will pick up to 2.3 percent in the second 

quarter and 2.4 percent in the second half of the year.

Labor Market Conditions Continued to Improve and Inflation Slowed

The pace of job creation remained strong during the second half of 2015, and the 

unemployment rate moved lower. Nonfarm payroll employment increased by 

228,000 per month on average during the nine months ending in March 2016, 

compared with average monthly gains of 220,000 over the first six months of 

2015. The unemployment rate has declined by 0.3 percentage point since June 

2015, and in March 2016 stood at 5.0 percent. Other indicators of labor 

utilization, including the rate of involuntary part-time employment, have also 

improved since mid-2015 but are still elevated compared with pre-recession 

levels and suggest some slack remains in labor markets. 

Inflation picked up in late 2015, but was still relatively low in early 2016. The 

consumer price index rose 0.9 percent during the year ending in March 2016, 

compared with a 0.1 decline during the year ending in March 2015. Core 

consumer inflation (excluding energy and food prices) was 2.2 percent over the 

year ending in March 2016, up from 1.8 percent during the same period a year 

earlier. Wage pressures remained subdued, although there is some evidence that 

compensation growth started to strengthen in late 2015. Average hourly earnings 

rose 2.3 percent over the twelve months ending in March 2016, stepping up 

slightly from gains averaging 2 percent from 2011 through 2014. However, the 

Employment Cost Index (ECI) for private-industry workers showed compensation 

rising 1.9 percent and wages rising 2.1 percent over the twelve months of 2015, 

roughly in line with gains of recent years. 
11

Putting Public Finances on a Sustainable Path Remains a Priority

The federal budget deficit continued to narrow in FY 2015, declining to 2.5 

percent of GDP from 2.8 percent of GDP in FY 2014. Since peaking in 2009, the 

deficit has fallen by 7.3 percentage points—the most rapid pace of fiscal 

consolidation for any six-year period since the demobilization following World 

War II. The Administration’s FY 2017 Budget shows the deficit declining slightly 

further, to 2.3 percent of GDP, in FY 2018 and stabilizing at 2.6 percent of GDP 

from FY 2019 to FY 2026—well below the 40-year average of 3.2 percent of GDP. 

The primary deficit (non-interest outlays less receipts) will be eliminated by FY 

2021, and will be roughly neutral thereafter and not add to the federal debt. 

Publicly-held debt as a share of the economy declined to 73.8 percent of GDP in 

FY 2015; it is projected to stabilize at 76.5 percent of GDP in FYs 2016 and 2017 

and then decline gradually to 75.3 percent in FY 2026.

U.S. External Trends

Developments in the U.S. Current Account and Trade Balances

The U.S. current account deficit rose to 2.7

percent of GDP in 2015, up from 2.2 percent 

of GDP in 2014, but still well below the peak 

deficit of 5.8 percent of GDP in 2006. The 

deficit of goods trade widened by $17.8 

billion in 2015 compared to 2014, as a sharp 

fall in the petroleum deficit—due to lower oil 

prices—was more than offset by a widening

in the non-petroleum goods deficit. The 

surplus in services in 2015 fell as well, by 

$13.6 billion relative to 2014, as services 

imports growth edged out services exports 

growth. The largest driver of the widening current account deficit in 2015 came

from a drop in the primary income (net factor income) surplus, which declined by 

nearly $47 billion as earnings declined on U.S. assets held abroad.

During 2015, two offsetting factors, low oil prices and weak conditions abroad, 

influenced the U.S. goods deficit. First, low oil prices helped shrink the U.S. 

petroleum deficit to $85 billion in 2015, a decrease of $104.7 billion relative to 
12

2014. The oil deficit in terms of GDP was at its lowest level since 1998, at just 0.5 

percent of GDP. This boost to the trade balance from oil was more than offset, 

however, by weak growth abroad and an associated stronger dollar, both of 

which contributed to a decrease in U.S. non-petroleum exports. Meanwhile, nonpetroleum imports rose during this same period, driving the aggregate nonpetroleum deficit higher by $122.6 billion, to roughly 3.8 percent of GDP. Overall, 

U.S. exports by volume decreased in 2015 by 0.5 percent compared a 2.5 percent 

increase in global trade.

At the end of the fourth quarter of 2015, the U.S. net international investment 

position stood at a deficit of $7.4 trillion (41 percent of GDP), a slight increase 

over the end-2014 position. The value of U.S.-owned foreign assets was $23.2

trillion, while value of foreign-owned U.S. assets stood at $30.6 trillion. Much of 

the recent deterioration over the past year has been driven by valuation effects 

that lowered the dollar value of U.S. assets held abroad.

The Dollar in Foreign Exchange Markets

The dollar continued to appreciate 

against both advanced and 

emerging market currencies in the 

second half of 2015, reflecting 

comparatively strong U.S. 

economic performance and 

prospects, and the implications 

that has for divergent monetary 

policies. Concerns about growth 

prospects in China, discussed in 

more detail later in the Report, 

generated considerable volatility 

in financial markets and caused 

several other currencies to 

depreciate against the U.S. dollar. On a nominal, trade-weighted basis, the dollar 

appreciated 6.5 percent between end-June 2015 and end-December 2015. The 

dollar appreciated the most against the Brazilian real—by 27.3 percent between 

end-June 2015 and December 2015. Amid political uncertainty, Brazil has been 

hit hard by falling commodity prices that have exacerbated fiscal deficits, which in 
13

turn have complicated efforts to restrain high inflation. Declining oil prices have 

also put downward pressure on the Mexican peso, and falling commodity prices 

in general contributed to depreciation of the Canadian dollar against the U.S. 

dollar. The dollar rose 6.7 percent against the British pound amid weaker-thanexpected economic data for the UK, shifting Bank of England policy expectations,

and uncertainty over the future of the UK’s membership in the European Union. 

Against the euro, the dollar’s increase was more modest, 2.7 percent. Against the 

Japanese yen, the dollar depreciated by 1.5 percent. 

Beginning in January 2016, the dollar began to depreciate against advanced

economy currencies. During the first quarter of 2016, the dollar depreciated 2.9

percent on a nominal effective basis, reflecting a 4.9 percent decline against 

advanced economy currencies, particularly those of Japan and Canada. The dollar 

was flat against major emerging market trading partners as a group, but 

depreciated against the Brazilian real quite significantly.

International Economic Trends

The outlook for the global economy remains of concern, not least because the 

growth of aggregate demand has been modest and various high frequency 

indicators point to weaknesses. Starting with concerns over the pace of growth in 

China, and then turning to concerns over falling oil prices, renewed low inflation, 

deteriorating bank profits, and potentially worsening bank exposures, volatility in 

equity, bond, and currency markets rose substantially over the latter part of 2015 

and into early 2016. 
14

Global growth has decelerated, falling in 

2015 to 3.1 percent, its lowest level in 

six years. The deceleration was driven 

by slower growth in emerging market 

economies. IMF data show that every 

developing economy region except 

Emerging and Developing Europe 

decelerated in 2015.6 Advanced 

economies have fared only slightly 

better. As noted previously, growth in 

the United States is expected to 

accelerate. Growth in Europe also has 

increased, though given how delayed and uneven it is, there remains scope in 

Europe for stronger growth with a stronger set of policy support. Growth in Japan 

has been highly variable and private consumption has been especially weak since 

the consumption tax was increased in April 2014. 

Global current account imbalances have 

declined from their peak in 2007, but 

much of the decline reflects a 

contraction in demand on the part of 

some current account deficit economies

rather than strong domestic demand 

growth in current account surplus 

economies. Several very large and 

persistent surpluses have widened 

further (Germany, Korea, Taiwan). In 

the absence of stronger domestic 

demand in the larger surplus economies, 

global growth has suffered and will 

continue to suffer if global adjustment 

continues to occur mainly through weakened demand in the deficit economies. 

 

6

IMF World Economic Outlook Update, April 2016.

-3

-2

-1

0

1

2

3

4

Headline Current Account Balance 

(% of Global GDP)

Germany China Statistical Discrepancy

United States Other Surplus Other Deficit

Other Asian Countries Oil Exporters
15

The large current account surpluses 

of Germany, China, Japan, Taiwan, 

and Korea all expanded in 2015, both 

in dollar terms and as shares of their 

GDP. Low oil prices played a 

significant role in these expanding 

surpluses, likely accounting for 2 

percentage points of GDP or more of 

the growth in surpluses in these 

economies. 

China

China’s current account surplus for the 

second half of 2015 was $157 billion 

(2.8 percent of GDP), compared with 

$174 billion (3.1 percent of GDP) in the 

second half of 2014. Overall, the 

current account surplus grew to 3.1

percent of GDP ($331 billion) in 2015, 

up from 2.7 percent ($277 billion) in 

2014, but well below its peak of 10 

percent of GDP in 2007. The growing 

surplus was driven by lower nominal 

merchandise imports, reflecting a 

contraction in import volumes and falling commodity prices. Merchandise export 

volumes and values declined by 2.9 percent and 5.5 percent, respectively, in the 

second half of the year versus the second half of 2014. China’s services deficit 

remained large, possibly reflecting disguised capital outflows. China runs a 

merchandise trade surplus and a services deficit with the United States. China’s 

bilateral merchandise trade surplus was $365 billion in 2015, up from $343 billion 

in 2014, according to U.S. Census data. But the United States has a surplus of 

roughly $30 billion in its trade in services with China and, therefore, China’s 

bilateral trade in goods and services balance with the United States is a bit lower. 
16

Through August of last year, China 

kept the RMB stable against the 

dollar, but as the dollar strengthened 

against most other currencies, the 

RMB appreciated on a tradeweighted basis.7

 In August, China 

surprised the markets with a change 

in its exchange rate policy, which the 

Chinese have indicated is another 

step in its move to a more marketdetermined exchange rate. The 

policy shift resulted in RMB 

depreciation of 3 percent against the dollar over two days. In December, the 

Chinese authorities sought to re-orient investor attention away from the U.S. 

dollar-RMB bilateral exchange rate toward a new trade-weighted measure. Taken 

together, the August and December measures effectively shifted market 

expectations for the future path of the RMB, and market forces are presently 

exerting downward pressure on the currency. Market participants remain highly 

sensitive to the signals from the Chinese authorities on the exchange rate, 

highlighting the importance of the clear communication of policy actions and 

greater transparency. 

China’s central bank, the People’s Bank of China (PBOC), has sought to maintain 

flexibility in how it manages the exchange rate. It has also indicated that there is 

no basis for persistent RMB depreciation based on economic fundamentals. 

Stabilizing growth, including with fiscal policies that support consumption and 

lower China’s high national savings rate, should be part of a policy mix that 

supports economic rebalancing and re-anchors expectations. Core factors that 

have been supportive of the RMB remain in place, including high net savings, 

strong external balances which include a sizeable and growing current account 

surplus, and improved terms of trade reflecting lower commodity prices. China 

has the tools to create the conditions for an orderly transition to a marketdetermined exchange rate. Overall, the RMB should continue to experience real 

appreciation over the medium-term. Chinese authorities have stressed that the 

RMB will continue to be a strong currency, given China's current accounts surplus, 

 

7

Equivalent to 6 percent nominal appreciation against a trade-weighted basket that the Chinese central bank 

introduced in December and published by the China Foreign Exchange Trade System (CFETS).
17

higher economic growth, large foreign exchange reserves, and stable fiscal and 

financial conditions.

Japan

Japan’s current account surplus for 

the second half of 2015 reached 

$72.4 billion (3.5 percent of GDP), 

compared with $36.5 billion (1.7

percent of GDP) in the second half 

of 2014. For all of 2015, the 

current account surplus registered 

3.3 percent of GDP, a substantial 

increase from 0.8 percent in 2014, 

driven by improvements in the 

trade balance due to lower oil 

prices and continued strong net 

foreign income (due in part to valuation effects stemming from the weaker yen). 

In November, Japan recorded its first seasonally-adjusted trade surplus (goods 

and services) since March, but export volumes fell by 3.4 percent in the second 

half of 2015 as compared with the second half of 2014. Export volumes have 

continued to fall since reaching a peak at the end of 2014, dipping 0.8 percent in 

2015 in part due to a contraction in shipments to China. At the same time, import 

volumes remain below their March 2014 peak, and declined in the last quarter of 

2015. Japan’s merchandise trade surplus with the United States totaled $33.9 

billion for the last six months through December, the third largest after China and 

Germany and on par with the same period one year earlier. Including services, 

Japan’s overall trade surplus (merchandise plus services, seasonally adjusted) with 

the United States falls to $28.1 billion for the same period. 

In January the Bank of Japan (BOJ) surprised markets by introducing negative 

interest rates on a portion of excess reserves, with BOJ Governor Kuroda saying 

the BOJ will continue to do whatever it takes to achieve its 2 percent inflation 

target. After initially depreciating in the days following the BOJ decision, the yen 

resumed its appreciation against the dollar and, as of end-March, stood 8.9

percent stronger since its recent low in mid-November. Japanese authorities 

characterized exchange rate movements as “quite rough” and said that they 
18

would “continue to watch the foreign exchange market with a sense of tension, 

and . . . act appropriately if that becomes necessary.” Japan has not intervened in 

the foreign exchange market in over four years. Treasury assesses that current 

conditions in the dollar-yen foreign exchange market are orderly, and reiterates 

the importance of all countries adhering to their G-20 and G-7 commitments

regarding exchange rate policies.

8

In the context of the G-7 and G-20, Japan has committed to use all policy tools—

monetary, fiscal, and structural—to foster confidence and strengthen the 

recovery and agreed that monetary policy alone cannot lead to balanced growth. 

Given Japan’s fragile growth outlook and weak global demand, it is increasingly 

important that the authorities use all policy levers, including pursuit of (1) a 

flexible fiscal policy in the near-term that provides a supportive fiscal impulse and 

(2) an ambitious structural reform agenda that prioritizes measures to lift nearterm growth (such as corporate tax reform, policies to address labor market 

duality, and the revitalization of local economies) while continuing to move 

forward on reforms with longer-term benefits (such as reforms associated with 

the Trans-Pacific Partnership and a stronger R&D infrastructure).

Korea

Korea’s current account surplus for 

the second half of 2015 reached $50

billion (7.4 percent of GDP), the 

second largest as a percent of GDP 

among G-20 countries, just after 

Germany, compared with $43 billion 

(6.0 percent of GDP) in the second 

half of 2014. For all of 2015, the 

current account surplus rose to 

7.7 percent of GDP, from 6.0 percent 

of GDP in 2014. In the case of Korea, 

the larger current account surplus owed to lower import prices, particularly for 

energy and other commodity imports, with energy imports constituting roughly 

 

8

These include the G-7 commitments to orient fiscal and monetary policies towards domestic objectives using 

domestic instruments and to not target exchange rates. G-20 commitments include commitments to avoid 

persistent exchange rate misalignments and not target exchange rates for competitive purposes. Both the G-7 and 

G-20 have committed to consult closely on exchange market issues.
19

40 percent of Korean imports. In 2015, merchandise import volumes grew by 

3.1 percent while exports rose by 2.5 percent. The growth in import volumes

owes to a recovery in the housing 

market and fiscal stimulus 

introduced during the second half of 

the year. Korea’s merchandise 

trade surplus with the United States 

totaled $13.7 billion for the last six

months through December; while 

the combined trade and services 

surplus was lower, at $6.8 billion, 

over the same period.

Taiwan

Taiwan fell into recession in the 

middle of 2015, with a contraction

of 6 percent of GDP annualized in 

the second quarter and a 0.2 

percent contraction in the third 

quarter driven by a decline in 

exports. Economic activity picked 

up to 2.2 percent annualized in 

the fourth quarter on the 

announcement of an investment 

support program by the 

government in June and monetary easing in September. For all of 2015, GDP 

grew just 0.8 percent compared to 3.9 percent in 2014, with net exports 

subtracting 0.7 percent from overall 2015 growth as export volumes declined 

significantly. Despite the decline in net exports, Taiwan’s goods and services 

trade surplus increased sharply, owing to a sharp improvement in Taiwan’s terms 

of trade. Taiwan’s current account surplus for the second half of 2015 reached 

$38.4 billion (15.0 percent of GDP), compared with $33.3 billion (12.4 percent of 

GDP) in the second half of 2014. For all of 2015, the current account surplus 

reached $76 billion (14.6 percent of GDP) compared to 12.4 percent of GDP in 

2014. Taiwan’s merchandise trade surplus with the United States totaled $6.9 

billion for the last six months through December. In the balance of payments, the 
20

higher current account surplus was partially offset by financial outflows, which 

increased to $68 billion or 13 percent of GDP, as insurers continued to invest 

heavily in foreign debt instruments. 

Europe

The current account surplus of the euro 

area expanded significantly in 2015, to 

3.2 percent of GDP from 2.4 percent in 

2014, driven in large part by an increase 

in the German current account, which 

increased to about 8.6 percent of GDP 

in 2015 from 7.4 percent in 2014. As 

elsewhere, much of the increase 

reflected lower commodity prices, but 

weak investment spending and a 

depreciated euro also contributed to 

the surplus. Investment spending remains 15 percent below its pre-crisis peak. 

The euro depreciated by over 20 percent against the dollar from the spring of 

2014 to the spring of 2015, but was relatively stable against the dollar for the 

remainder of 2015. In nominal and real effective terms, the euro has appreciated 

by around 4 percent since the spring of 2015. Most euro area periphery 

economies continue to run small current account surpluses due to adjustments 

following years of sustained deficits.

The euro area’s economy strengthened moderately in 2015, supported by low 

commodity prices, monetary stimulus, and a weak euro. Real GDP growth came 

in at 1.6 percent for the year, up from 0.9 percent in 2014. Still, the region’s 

output remains only near its pre-crisis peak, growth decelerated in the second 

half of the year, and inflation remains well below the ECB’s target. Therefore, it is 

critical for euro area economies to deploy a more balanced set of tools, including 

fiscal and structural policies, to provide support to domestic demand, particularly 

investment. Several countries—including Germany—have the fiscal space to 

provide more support for domestic demand. Boosting demand growth through 

increased fiscal support for infrastructure investment and greater private 

consumption is essential to sustaining the recovery of the euro area. The 

adjustment process, both within the euro area and globally, would function much 
21

better if countries with large current account surpluses took strong action to 

boost investment.

 

Overall global growth is being held back by (1) still high private sector leverage in 

some economies; (2) inadequate macroeconomic support; and (3) sluggish 

lending growth in some economies. Weak investment is often cited as a 

contributing factor to subdued global growth, but investment tends to follow GDP 

growth. Still, as noted, some countries could take steps to lift both private and 

public investment. Trade growth also has decelerated. More policy action is 

needed globally to strengthen demand. Monetary policy responses have been 

forceful in general, but they need to be supported with additional fiscal actions to 

deliver a stronger boost to domestic demand. Policy space exists; exceptionally 

low long-term interest rates provide governments with more fiscal breathing 

room than under historically normal circumstances. And there are a number of 

advanced and emerging market economies with large external surpluses (both 

nominal and as a share of GDP), including Germany, China, Korea, and Taiwan, 

that could bolster domestic demand and contribute both to stronger global 

growth and a more balanced global economy. 

International Capital Flows

The volume of capital flows increased 

markedly in 2015, especially among 

emerging markets, and unlike most 

years when the flows were 

predominately toward emerging 

market economies, 2015 saw large 

outflows of capital from emerging 

markets. Outflows gained momentum 

especially in the second half of the 

year. Net outflows were particularly 

large from China. Most emerging 

economies do not provide the degree 

of data disaggregation necessary to ascertain who or what is driving the flows. 

Private analysts estimate that roughly two thirds of recent capital outflows from 

China stem from repayment of foreign debt, an increase in corporate dollar 

deposits, and outbound Chinese FDI rather than a broader flight by Chinese 
22

residents from domestic assets or a reversal of foreign investment in China. 

Brazil’s highly detailed balance of payments data shows that net portfolio 

investment by foreigners turned negative in June of 2015 and stayed negative for 

most of the remainder of the year. But this was due to a slowdown in gross 

foreign inflows rather than an acceleration of foreign outflows. 

Advanced economies saw weaker 

capital flows in the latter half of 

2015. In aggregate, foreign 

portfolio inflows to advanced 

economies (including from 

amongst themselves) turned 

negative beginning in the third 

quarter of 2015, with the sum of 

net foreign direct and portfolio 

investment in negative territory 

over the latter half of last year. 

These aggregates reflect 

investment between advanced 

economies, and mask some economy-specific variation. Japan and the UK saw 

significant portfolio inflows from abroad in the second half of 2015 in the context 

of international market volatility, while euro area saw moderate portfolio 

outflows. 

Global Currency Markets

Global currency markets have experienced 

bouts of volatility over the past six months. 

Through August of last year, China kept the 

RMB generally stable against the dollar, 

but as the dollar continued to strengthen 

against most other currencies, the RMB 

also appreciated on a trade-weighted 

basis. The unanticipated change in China’s 

exchange rate policy in August 2015

resulted in RMB depreciation of 3 percent 

against the dollar over two days. That shift subsequently generated considerable 
23

volatility in financial markets and caused several other currencies to also 

depreciate against the U.S. dollar. In December, the Chinese authorities 

introduced a multi-currency index to re-orient markets away from the dollar-RMB 

bilateral exchange rate toward a trade-weighted measure of the RMB’s value, but 

subsequently allowed the RMB to depreciate against this new index. The lack of 

clarity on communication about exchange rate policy, along with a weaker growth 

outlook, raised investor questions about the future path of the RMB. By late 

March 2016 the RMB had depreciated 3.8 percent against the dollar and 

7 percent against the PBOC’s trade-weighted China Foreign Exchange Trade 

System (CFETS) basket compared to early August 2015. In late February 2016, in 

statements to the press, China pledged to improve communications on its 

exchange-rate policy with the market. Chinese authorities have also stated that 

there is no basis for sustained devaluation of the Chinese currency.

On a nominal, trade weighted basis, emerging market currencies followed 

different paths over 2015. Brazil and Mexico continued on their depreciation 

paths which started in mid-2014. The rate of depreciation of the Mexican peso 

accelerated in late 2015, while the Brazilian real stabilized in the last quarter of 

2015. In Asia, the path of the Indian rupee was fairly flat over the year, with a 

modest appreciation in the fourth quarter of 2015. In contrast, the Korean won 

and the new Taiwan dollar (NTD) began depreciating in mid-2015 and, like the 

Mexican peso, the rate of depreciation accelerated in late 2015. 

Most advanced economy currencies covered in this Report began appreciating on 

a nominal trade-weighted basis in the latter half of 2015. Two exceptions are the 

Canadian dollar, where falling commodity prices in general contributed to 

depreciation; and the British pound, which began depreciating in late-2015 amid 

weaker-than-expected economic data and shifting Bank of England policy 

expectations, alongside uncertainty over the UK’s continued membership in the 

European Union. In real terms, exchange rates followed similar paths over 2015.

Foreign Exchange Reserves

In the latter half of 2015, many emerging market central banks responded to 

capital outflows by either raising domestic interest rates or intervening in 

exchange markets to defend their currencies. The interventions caused central 

banks to dip into their stocks of foreign exchange reserves. 
24

Measured world foreign currency 

reserves declined from a peak of around 

$12 trillion in July 2014 to about 

$10.9 trillion as of end-December 2015—

the latest data available—a decline of 

$1.1 trillion. The overall decline is a 

combination of two developments: (1) 

selling of foreign currency reserves to 

support currencies facing depreciation 

pressures and (2) valuation changes in 

the context of changing reserve currency 

valuations.

9

 Of the economies covered in 

the Report, China, Korea, and Taiwan do not publish their foreign exchange 

intervention activities so it is not possible to separate precisely foreign currency 

transactions from valuation changes.10 

 

China has intervened heavily in the 

foreign exchange markets to support the 

RMB after strong downward market 

pressure triggered by a surprise change in 

China’s foreign exchange policy last 

August. Such a depreciation would have 

had negative consequences for the 

Chinese and global economies. More 

clarity over exchange rate goals and, that 

devaluation will not be used to support 

growth, would help stabilize the market. 

Treasury estimates that from August 

2015 through March 2016, China sold more than $480 billion in foreign currency 

assets to support the value of the RMB. 

 

9

Economies hold a basket of foreign currencies but typically report the total in U.S. dollars. When the dollar 

appreciates against other foreign currencies, the reported dollar value of those currencies declines. 

10 In addition, Taiwan does not currently release foreign exchange reserves information according to the IMF’s 

Special Data Dissemination Standard (SDDS). Taiwan is not a member of the IMF but does use SDDS templates for 

the release of other macroeconomic and financial data.
25

Many other emerging market economies, including Brazil, have felt downward 

pressure on their currencies and have intervened as well to support their 

currencies. After the Mexican peso reached a record low against the dollar on 

February 11, 2016 on February 17, 2016 the Bank of Mexico announced a surprise 

hike of the policy interest rate by 0.5 percent (to 3.75 percent), indicated that it 

will eliminate a previous rules-based currency intervention program (started in 

late 2014 to support the peso), and will now undertake intervention as needed, 

on a discretionary basis, to respond to market volatility. 

Treasury estimates that Korea intervened 

in the foreign exchange market in 2015 

both to resist appreciation and to resist 

depreciation of the won during periods of 

financial market turbulence. For the 

second half of 2015 through March 2016, 

Treasury estimates that on net, the 

authorities intervened to support the 

won, selling an estimated $26 billion in 

foreign exchange, including activity in the 

forward and swaps market. This 

represented a shift from several years of 

asymmetric intervention to resist appreciation. Appreciation of the won over the 

medium-term would help Korea reorient its economy away from its current heavy 

reliance on exports by encouraging the reallocation of resources to the nontradables sector. Treasury has urged Korea to limit its foreign exchange 

intervention only to circumstances of disorderly market conditions. In addition, 

the Korean authorities should increase the transparency of their foreign exchange 

operations and take further steps to 

support domestic demand. 

 

Treasury estimates that Taiwan’s authorities 

continued to make net foreign currency 

purchases through most of 2015. 

Moreover, intraday foreign exchange 

activity suggests that the central bank 

continued to intervene regularly at the end 

of the trading day through most of 2015 to 
26

weaken the currency. These actions suggest intervention mainly to prevent 

appreciation of the NTD, which would not be compatible with Taiwan’s stated 

currency policy to smooth volatility and intervene only when the market is 

“disrupted by seasonal or irregular factors.” Treasury estimates net foreign 

exchange purchases averaged $1.3 billion per month in the first ten months, 

followed by net foreign currency sales of $600 million in November and $140 

million in December. Foreign exchange reserves totaled $426 billion (80 percent 

of GDP) at the end of 2015, an increase 

of $7 billion. 

 

Even with sizeable foreign currency 

sales, as of end-2015 emerging market 

economies appear to be adequately 

reserved, with reserves more than 

double short term debt in all emerging 

market economies covered in this 

Report, and some over 500 percent of 

short term debt. 

FX reserves as % 

of short term 

debt

FX reserves as % 

of GDP

Brazil 597.4% 21.0%

China 536.2% 30.8%

India 382.5% 16.0%

Korea 299.9% 26.2%

Taiwan 294.2% 82.4%

Mexico 253.9% 15.4%

Japan 53.5% 28.7%

Canada 13.3% 4.5%

Euro Area 5.5% 2.1%

UK 1.8% 3.5%

Data as of end-December 2015
27

Section 2: Intensified Evaluation of Major Trading Partners

Key Criteria

Drawing on the discussion and analysis in the previous section, we now focus 

explicitly on an intensive evaluation of the criteria put forward in the provisions of 

the Trade Facilitation and Trade Enforcement Act of 2015 . The objective is 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.

Criterion (1) - Significant bilateral trade surplus with the United States:

Column one in Table 1 provides the bilateral goods trade balances for 12 of our 

largest trading partners, accounting for around 70 percent of U.S. trade, for 

calendar year 2015.11 China, by far, has the largest trade surplus with the United 

 

11 Although this Report does not treat the euro area itself as a major trading partner for the purposes of the Act—

this Report assesses euro area countries individually—data for the euro area are presented in Table 1 and 

elsewhere in this Report both for comparative and contextual purposes, and because policies of the ECB, which 

Table 1 

Bilateral goods 

trade balance 

(2015, Bil. $)

(1)

Percent of GDP

(2015)

(2)

Memo : 3 year 

change

percent of GDP

(2a)

Net FX purchases, 

percent of GDP

(3)

Persistent net 

purchases of 

foreign currency1

(3a)

China 365.7 3.1% 0.5% -3.9%* N

Germany 74.2 8.5% 1.5% - N

Japan 68.6 3.3% 2.3% 0.0% N

Mexico 58.4 -2.8% -1.4% -1.8% N

Korea 28.3 7.7% 3.5% 0.2%* N

Italy 27.8 2.2% 2.6% - N

India 23.2 -1.1% 3.8% 1.8% N

France 17.6 -0.2% 1.0% - N

Canada 14.9 -3.3% 0.3% 0.0% N

Taiwan 14.9 14.6% 5.0% 2.4%* Y

UK 1.5 -5.2% -1.9% 0.0% N

Brazil (4.3) -3.3% -0.3% 0.1% N

Memo: Euro Area 130.2 3.2% 1.9% 0.0% N

* Treasury Estimates

Current Account Intervention
28

States, after which the size of bilateral trade surpluses declines very quickly. 

Treasury assesses that economies with a bilateral goods surplus of at least $20 

billion (roughly 0.1 percent of U.S. GDP) have a “significant” surplus. Highlighted 

in red are the major trading partners that have a bilateral surplus that meets this 

threshold over calendar year 2015. In the aggregate, this threshold captures

about 80 percent of the value of all trade surpluses with the United States.

12

 

Criterion (2) - Material current account surplus:

Treasury assesses current account surpluses in excess of 3 percent of GDP to be 

“material” for the purposes of enhanced analysis. Highlighted in red in column 2 

are the five economies that had a current account surplus in excess of 3 percent 

of GDP in 2015. While the change in the current account surplus over three years 

is not a criterion for enhanced analysis, column 2a indicates that those with the

largest surpluses are also those that have seen a significant widening of their 

surpluses over the last three years. 

Criterion (3) – Persistent, one-sided intervention: 

Treasury assesses persistent, one-sided intervention to be net purchases of 

foreign currency, conducted repeatedly, totaling in excess of 2 percent of an

economy’s GDP over a period of 12 months. Columns 3 and 3a in Table 1 provide 

Treasury’s assessment of this criterion. Numbers with an asterisk indicate 

Treasury estimates as these economies do not publish intervention data. Only 

Taiwan meets this criterion during the 12 calendar months of 2015, per Treasury 

estimates.

 

holds responsibility for monetary policy for the euro area, will be assessed as the monetary authority of individual 

euro area countries.

12 See Section 3 for a discussion of the factors used to assess the three criteria which, taken together, would 

require enhanced analysis.
29

Summary of Findings

Pursuant to the Act,13 Treasury finds that no economy currently satisfies all 

three criteria, however, five major trading partners of the United States met 

two of the three criteria for enhanced analysis. Treasury is creating a new 

Monitoring List that includes these economies: China, Japan, Korea, Taiwan, and 

Germany. China, Japan, Germany, and Korea are identified as a result of a 

material current account surplus combined with a significant bilateral trade 

surplus with the United States. Taiwan is identified as a result of its material 

current account surplus and its persistent, one-sided intervention in foreign 

exchange markets. Treasury will closely monitor and assess the economic 

trends and foreign exchange policies of these economies.

 China has both a significant bilateral trade surplus with the United States and a 

material current account surplus. China has intervened heavily in the foreign 

exchange markets in recent months to support the RMB after strong 

downward market pressure triggered by a surprise change in China’s foreign 

exchange policy last August. Such a depreciation would have had negative 

consequences for the Chinese and global economies. More clarity over 

exchange rate goals, and that devaluation will not be used to support growth,

would help stabilize the market. Treasury estimates that from August 2015 

through March 2016, China sold more than $480 billion in foreign currency 

assets to support the value of the RMB. At the same time, China has a very 

large and growing bilateral goods trade surplus with the United States. This 

underscores the need for further implementation of structural reforms to 

rebalance the Chinese economy to household consumption, and for 

consumption-friendly fiscal stimulus to support demand. 

 Japan has a significant bilateral trade surplus with the United States and a 

material current account surplus. Japan has not intervened in the foreign 

exchange market in over four years. Given Japan’s fragile growth outlook, it is 

increasingly important that the authorities use all policy levers, including a 

flexible fiscal policy and an ambitious structural reform agenda, to lift nearterm growth. Treasury assesses that current conditions in the dollar-yen 

foreign exchange market are orderly, and reiterates the importance of all 

 

13 Section 701 of the Trade Facilitation and Trade Enforcement Act of 2015, 19 U.S.C. § 4421.
30

countries adhering to their G-20 and G-7 commitments regarding exchange 

rate policies. 

 Korea has a significant bilateral trade surplus with the United States and a 

material current account surplus. Treasury estimates that during the second 

half of 2015 through March 2016, the Korean authorities intervened to resist 

depreciation of the won during periods of financial market turbulence, selling 

an estimated $26 billion in foreign exchange, including activity in the forward 

and swaps market. This represented a shift from several years of asymmetric 

intervention to resist appreciation. Appreciation of the won over the mediumterm would help Korea reorient its economy away from its current reliance on 

exports by encouraging the reallocation of resources to the non-tradables 

sector. Treasury has urged Korea to limit its foreign exchange intervention 

only to circumstances of disorderly market conditions. In addition, we 

encourage the Korean authorities to increase the transparency of their foreign 

exchange operations and take further steps to support domestic demand. 

 Taiwan has a material current account surplus and, per Treasury estimates, has 

engaged in persistent net foreign currency purchases through most of 2015. In 

light of Taiwan’s large current account surplus, such interventions are 

concerning. Taiwan’s bilateral trade surplus with the United States, however, 

was not significant at less than $15 billion in 2015, and thus Taiwan did not 

meet all three criteria the Act establishes to advance to enhanced analysis and 

engagement. Nonetheless, the authorities should limit foreign exchange 

interventions to the exceptional circumstances of disorderly market 

conditions, as well as increase the transparency of reserve holdings and 

foreign exchange market intervention.

 Germany has both a significant bilateral trade surplus with the United States 

and a material current account surplus. Germany’s 2015 current account 

surplus, valued at almost $290 billion, accounted for the bulk of the euro 

area’s surplus, and pushed the surplus of the euro zone to over 3 percent of 

GDP. The European Central Bank (ECB) has not intervened in foreign currency 

markets since 2011, and did so then as part of a G-7 concerted intervention to 

stabilize the yen following Japan’s earthquake and tsunami. Nonetheless, 

Germany has the second largest current account surplus globally,. This 

represents substantial excess saving—more than 8 percent of GDP—that 
31

could, at least in part, be used to support German domestic demand, while 

reducing the current account surplus and contributing markedly to euro-area 

and global rebalancing. In Treasury’s view, Germany has adequate policy 

space to provide additional support to demand.

The fact that no major trading partner met all three criteria during this period is a 

reflection, in part, of the dynamics of the global economy during the past year, in 

which capital outflows from emerging markets have led a number of economies 

to engage in foreign exchange intervention to resist further depreciation of their 

currency (rather than appreciation). The extent of these flows was unusually high 

by historical standards, which underscores the possibility that more economies 

may trigger these thresholds going forward. 

Treasury will continue to review the factors it uses to assess whether an economy

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, to ensure these new reporting and monitoring tools 

meet their objective of indicating where unfair currency practices may be 

emerging.

 
32

Section 3: New Assessment Factors for Enhanced Analysis14

This Section describes the factors Treasury used to assess, under Section 

701(a)(2)(A)(ii) of the Trade Facilitation and Trade Enforcement Act of 2015, 

whether an economy that is a major trading partner of the United States 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. 

In determining the appropriate factors to assess these criteria, Treasury took a 

thorough approach, analyzing data spanning 15 years across dozens of economies 

including all economies that have had a trade surplus with the United States 

during that period, and the group of economies that collectively represent 80 

percent of global GDP. The discussion below presents the findings of this analysis 

through 2015. 

Given that this is the first effort to formally implement this framework, Treasury 

will consult with external analysts to confirm the appropriateness of the 

thresholds described below. Treasury will also continue to review the factors it 

uses to assess these criteria to ensure that the new reporting and monitoring 

tools provided under the Act meet their objective of indicating where unfair 

currency practices may be emerging. 

A. (a)(2)(A)(ii)(I) a significant bilateral trade surplus with the United States

Trade patterns are driven by a host of different factors including production costs, 

geographic location, geological endowments, and consumer and producer 

demand patterns among many other things. Accordingly, it is rare for any given 

economy to have balanced trade overall, or with its bilateral trading partners. In 

assessing what constitutes a “significant” trade surplus, Treasury analyzed the size 

of bilateral trade surpluses with the United States over the past 15 years.

15 The 

 

14 This Section is submitted pursuant to Section 701(a)(3) of the Trade Facilitation and Trade Enforcement Act of 

2015, 19 U.S.C. § 4421. 

15 Given data limitations, we focus on trade in goods, not including services. The United States has a surplus in 

services trade with many countries in this Report including Canada, Brazil, China, Japan, Korea, Mexico, and the 

UK. Taking into account services trade would reduce the bilateral trade surplus of these countries with the United 

States. 
33

economy ordering by the size of bilateral surpluses in U.S. dollars is relatively 

stable, and there is a rapid drop off from the largest to smaller bilateral surpluses. 

The distribution of bilateral trade surpluses points to a threshold of a trade 

surplus of about $20 billion over the previous 12 months ending in mid- or endcalendar year to be considered “significant.” This threshold would generally 

include the group of economies representing about 80 percent of the value of all

trade surpluses with the United States, and corresponds closely to the top decile 

of trade surplus countries. It also captures all economies with a trade surplus 

with the United States that is larger than 0.1 percent of U.S. GDP. Over time, as 

global trade expands, this nominal figure will be reassessed to ensure it remains 

current and relevant. 

B. (a)(2)(A)(ii)(II) a material current account surplus

An economy’s current account balance reflects its trade balance and its income 

on assets abroad, less income it pays on foreign investment within its borders. As 

with trade balances, economies rarely have a balanced current account. 

Treasury took an approach in assessing what is a “material” current account 

surplus similar to the approach it took in assessing what constitutes a “significant”

bilateral trade surplus. Based on an examination of the current account balances

since 2000 of all economies, and taking into account a variety of studies in the 

economics literature that examine the impact of current accounts as well as with 

the practice of other policymakers, a surplus of 3 percent of GDP is considered 

material. Looking at 2014 data (the last full year for which data are available on 

global current account surpluses), a threshold of 3 percent of GDP captures 

economies that account for more than half of total global current account 

surpluses.

This threshold is broadly consistent with a variety of studies in the economics 

literature that examine the impact of current accounts as well as with the practice 

of other policymakers.

16

 

 

16

 External work that bears on this topic includes: (1) BIS working paper #169: Current Account Adjustment and 

Capital Flows, 2005; (2) the IMF’s World Economic Outlook, October 2014, Chapter 4: Are Global Imbalances at a 

Turning Point?; and (3) the EU’s Occasional Paper #92, Scoreboard for the surveillance of macroeconomic 

imbalances, 2012. 
34

C. (a)(2)(A)(ii)(III) engaged in persistent one-sided intervention in the foreign 

exchange market:

Governments accumulate reserves for a range of reasons. Foreign currency 

reserves may be needed for day-to-day transactions including debt repayments, 

payments to international organizations, and payments for imports. Economies 

with pegged exchange rates hold reserves to counter downward pressure on their 

currencies. Economies with flexible exchange rates hold reserves in order to 

intervene in foreign exchange markets to prevent a disorderly depreciation of 

their currencies. Reserve holdings also can provide a defense against substantial 

and rapid capital outflows that could cause a loss of investor confidence and a 

currency crisis. At the same time, excess reserve accumulation by one or a subset 

of economies runs counter to the effective rebalancing of global demand, can 

distort the international monetary system and, by bidding up the cost of reserve 

assets, also makes it more expensive for vulnerable economies to build up their 

own precautionary buffers. 

In defining what constitutes persistent, one-sided intervention, it is important to 

acknowledge that there are very few examples in the economic literature or 

policy practice to draw on as precedents. There is also no single metric by which 

to assess reserve levels. Treasury has set a threshold for this criterion of net 

purchases of foreign currency, conducted repeatedly, totaling at least

2 percent of an economy’s GDP over a period of 12 months ending either June or 

December. This quantitative threshold would capture all of the major periods of 

foreign exchange intervention by important emerging markets since 2000. For 

example, based on Treasury estimates, both China and Taiwan would have met 

this threshold for 12 of the past 15 years, and Korea would have met the 

threshold for several of those years. In assessing the persistence of intervention, 

Treasury will consider an economy that is judged to have purchased foreign 

exchange on net for 8 of the 12 months to have met the threshold, although 

other patterns of intervention may also meet the persistence threshold. 

Treasury used publicly available data for intervention on foreign asset purchases 

by country authorities, or as estimated by Treasury staff using valuation-adjusted 

foreign exchange reserves. This methodology requires assumptions about both 

the currency and asset composition of reserves in order to isolate returns on 
35

assets held in reserves and currency valuation moves from actual purchases and 

sales, including estimations of transactions in foreign exchange derivatives 

markets. Treasury also uses alternative data series when they provide a more 

accurate picture of foreign exchange balances, such as China’s monthly reporting 

of net foreign assets on the People’s Bank of China’s balance sheet and Taiwan’s 

reporting of net foreign assets at its central bank. To the extent the assumptions 

made are not reflective of the true composition of reserves, estimates may over 

or under state intervention. Treasury strongly encourages those economies in 

this Report that do not currently release data on foreign exchange intervention to 

do so.
36

Glossary of Key Terms in the Report

Exchange Rate – The price at which one currency can be exchanged for another. 

Also referred to as the bilateral exchange rate.

Exchange Rate Regime –The manner or rules under which an economy manages 

the exchange rate of its currency, particularly the extent to which it intervenes in 

the foreign exchange market. Exchange rate regimes range from floating to 

pegged.

Floating (Flexible) Exchange Rate – An exchange rate regime under which the 

foreign exchange rate of a currency is fully determined by the market with 

intervention from the government or central bank being used sparingly.

Foreign Exchange Reserves – Foreign assets held by the central bank that can be 

used to finance the balance of payments and for intervention in the exchange 

market. Foreign assets consist of gold, Special Drawing Rights (SDRs), and foreign 

currency (most of which is held in short-term government securities). The latter 

are used for intervention in the foreign exchange markets.

Intervention – The purchase or sale of an economy’s currency in the foreign 

exchange market by a government entity (typically a central bank) in order to 

influence its exchange rate. Purchases involve the exchange of an economy’s

foreign currency reserves for its own currency, reducing foreign currency 

reserves. Sales involve the exchange of an economy’s own currency for a foreign 

currency, increasing its foreign currency reserves. Interventions may be sterilized 

or unsterilized.

Nominal Effective Exchange Rate (NEER) – A measure of the overall value of an 

economy’s relative to a set of other currencies. The effective exchange rate is an 

index calculated as a weighted average of bilateral exchange rates. The weight 

given to each economy’s currency in the index typically reflects the amount of 

trade with that economy. 

Pegged (Fixed) Exchange Rate – An exchange rate regime under which an 

economy maintains a fixed rate of exchange between its currency and another 

currency or a basket of currencies. Typically the exchange rate is allowed to move 
37

within a narrow predetermined (although not always announced) band. Pegs are 

maintained through a variety of measures including capital controls and 

intervention. 

Real Effective Exchange Rate (REER) – A weighted average of bilateral exchange 

rates, expressed in price-adjusted terms. 

Trade Weighted Exchange Rate – see Nominal Effective Exchange Rate.