Macroeconomic and 

Foreign Exchange 

Policies of Major 

Trading Partners of the 

United States

REPORT TO CONGRESS

U.S. DEPARTMENT OF THE TREASURY

OFFICE OF INTERNATIONAL AFFAIRS

April 2018
Contents

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

SECTION 1: GLOBAL ECONOMIC AND EXTERNAL DEVELOPMENTS..................................... 6

U.S. ECONOMIC TRENDS .......................................................................................................................................6

INTERNATIONAL ECONOMIC TRENDS..................................................................................................................9

ECONOMIC DEVELOPMENTS IN SELECTED MAJOR TRADING PARTNERS......................................................15

SECTION 2: INTENSIFIED EVALUATION OF MAJOR TRADING PARTNERS.......................26

KEY CRITERIA .....................................................................................................................................................26

SUMMARY OF FINDINGS .....................................................................................................................................28

ANNEX I: REBALANCING THE GLOBAL ECONOMY – PROGRESS REPORT.........................30

ANNEX II: GLOBAL CAPITAL FLOWS – RECENT TRENDS AND VOLATILITY ....................38

GLOSSARY OF KEY TERMS IN THE REPORT ...............................................................................44

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 (IMF) management and staff in preparing this Report.
1

Executive Summary

The global economy accelerated in 2017 to its fastest pace of growth since the post-crisis

rebound in 2011. The broad-based strengthening of growth was led by the United States,

where domestic demand growth averaged 3 percent over the last three quarters of the

year, and by a synchronized expansion in Europe. The Administration’s economic focus is

on laying the foundation for sustained faster growth and higher real median incomes. The

new tax reform package, along with ongoing regulatory initiatives, aims to raise

investment, increase productivity, and facilitate small business formation and expansion. 

Reforms are being pursued in many advanced and emerging market economies, and

cementing these reforms would help brighten the medium-term outlook for the global

economy.

Notwithstanding the pick-up in global growth, the U.S. trade deficit widened in 2017,

mainly because domestic demand growth in our major trading partners lagged domestic

demand growth in the United States, trade and investment barriers persist in many

economies, and several surplus economies continue to have currencies that are

undervalued per estimates by the International Monetary Fund (IMF). 

The Administration remains deeply concerned by the significant trade imbalances in the

global economy, and is working actively across a broad range of areas to help ensure that

trade expands in a way that is fair and reciprocal. The United States’ bilateral trade deficits

with China, Japan, Germany, and Mexico are at very high levels. Further, as discussed in

more detail in Annex I, current account surpluses among several major trading partners

over the last two decades have proven both large and persistent. The global adjustment

process has not worked effectively to promote a symmetric adjustment toward smaller

imbalances in a manner that sustains – rather than inhibits – global growth. Nor are there

signs that currently point toward a narrowing of external imbalances. 

Achieving stronger and more balanced global growth will require that domestic demand,

including consumption and investment, become the sustained engine for economic

expansion in key economies that have maintained large and persistent external surpluses. 

This could be supported by these economies putting in place more efficient tax systems

with low rates and broad bases, regulatory frameworks that support domestic investment,

and sound monetary policies. The International Monetary and Financial Committee (IMFC)

last fall concluded that strong fundamentals, sound policies, and a resilient international

monetary system are essential to the stability of exchange rates, contributing to strong and

sustainable growth and investment. In March, all G-20 members similarly endorsed this

objective.

Securing faster global growth also requires that all economies durably avoid

macroeconomic, foreign exchange, and trade policies that facilitate unfair competitive

advantage. This Report, by monitoring where unfair currency practices may be emerging

and encouraging policies and reforms to address large external surpluses, represents an

important component of the Administration’s strategy for securing a stronger America and

a more robust and fair global economy.
2

Lastly, this Report contains an annex that surveys the composition and volatility of global

capital flows over the last few years. Large net capital flows have been the counterpart of

substantial current account imbalances across the global economy over the last few years,

or in China’s case large net capital outflows were the counterpart to significant reserve

sales. Notwithstanding the large nominal value of these capital flows, the annex shows that

the volatility of flows to emerging markets is in line with historical levels when the flows

are scaled to economic activity.

Treasury Assessments of Major Trading Partners

Treasury has established thresholds for the three criteria specified in the Trade Facilitation

and Trade Enforcement Act of 2015 (the “2015 Act”) that determine whether enhanced

analysis is necessary: (1) a significant bilateral trade surplus with the United States is one

that is at least $20 billion;2 (2) a material current account surplus is one that is at least 3

percent of gross domestic product (GDP); and (3) persistent, one-sided intervention occurs

when net purchases of foreign currency are conducted repeatedly and total at least 2

percent of an economy’s GDP over a 12-month period.3 In 2017, the $20 billion bilateral

trade surplus threshold captured almost 80 percent of the value of all trade surpluses with

the United States, while the 3 percent current account threshold captured more than threefourths of the nominal value of global current account surpluses.

Pursuant to the 2015 Act, Treasury has found in this Report that no major trading

partner met all three criteria during the four quarters ending December 2017. 

Similarly, based on the analysis in this Report, Treasury also concludes that no major

trading partner of the United States met the standards identified in Section 3004 of

the Omnibus Trade and Competitiveness Act of 1988 (the “1988 Act”) for currency

manipulation in the second half of 2017.

Because the standards and criteria in the 1988 Act and the 2015 Act are distinct, it is

possible that an economy could be found to meet the standards identified in one of the Acts

without being found to have met the standards identified in the other. In particular, a

finding that an economy met the standards in the 1988 Act of manipulating its currency

would require Treasury to examine a wider array of additional facts such as foreign

exchange reserve coverage, capital controls, monetary policy, or inflation developments.

 2 Given data limitations, Treasury focuses in this Report on trade in goods, not including services. The United

States has a surplus in services trade with many economies in this report, including Canada, China, Japan,

Korea, Mexico, Switzerland, and the United Kingdom. Taking into account services trade would reduce the

bilateral trade surplus of these economies with the United States.

3 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. These quantitative

thresholds for the scale and persistence of intervention are considered sufficient on their own to meet the

criterion. Other patterns of intervention, with lesser amounts or less frequent interventions, might also meet

the criterion depending on the circumstances of the intervention.
3

Treasury has established a Monitoring List of major trading partners that merit close

attention to their currency practices and macroeconomic policies. An economy meeting

two of the three criteria in the 2015 Act is placed on the Monitoring List. Once on the

Monitoring List, an economy will remain there for at least two consecutive Reports to help

ensure that any improvement in performance versus the criteria is durable and is not due

to temporary factors. As a further measure, this Administration will add and retain on the

Monitoring List any major trading partner that accounts for a large and disproportionate

share of the overall U.S. trade deficit even if that economy has not met two of the three

criteria from the 2015 Act. In this Report, the Monitoring List comprises China, Japan,

Korea, Germany, Switzerland, and India, the latter being added to the Monitoring List

in this Report. 

With regard to the six economies on the Monitoring List:

• China has an extremely large and persistent bilateral trade surplus with the United

States, by far the largest among any of the United States’ major trading partners, with

the goods trade surplus standing at $375 billion over the four quarters through

December 2017, an increase of $28 billion over 2016. Over 2017, the Chinese currency

generally moved against the dollar in a direction that should, all else equal, help reduce

China’s trade surplus with the United States; however, on a broad, trade-weighted basis,

the renminbi was broadly unchanged on net over 2017. Moreover, the increasingly

non-market direction of China’s economic development poses growing risks to its major

trading partners and the long-term global growth outlook. China should advance

macroeconomic reforms that support greater household consumption growth and help

rebalance the economy away from investment. Treasury also places significant

importance on China adhering to its G-20 commitments to refrain from engaging in

competitive devaluation and to not target China’s exchange rate for competitive

purposes; and on greater transparency of China’s exchange rate and reserve

management operations and goals. 

• Japan’s goods trade surplus with the United States did not diminish in 2017, and stood

at a still-large $69 billion over the four quarters through December 2017. Japan’s

current account surplus, meanwhile, grew over this period to 4 percent of GDP, its

highest level since 2010. Japanese officials have publicly voiced concern over the

appreciation of the yen this year, but Japan has not intervened in the foreign exchange

market in over six years. Treasury’s expectation is that in large, freely-traded exchange

markets, intervention should be reserved only for very exceptional circumstances and

with appropriate prior consultations. Japan should take advantage of the current

window of steady growth to enact critical structural reforms that can support sustained

faster expansion of domestic activity, create a more sustainable path for long-term

growth, and help reduce Japan’s public debt burden and trade imbalances. 

• Korea maintains large external imbalances, with a current account surplus standing at

5.1 percent of GDP in 2017, its sixth straight year over 3 percent of GDP. Korea’s goods

trade surplus with the United States registered $23 billion in 2017, contracting nearly
4

$5 billion from its 2016 level. The won appreciated by 13 percent against the dollar in

2017. There was a notable and concerning pick-up in intervention in November 2017

and January 2018 that appears to have been for the purpose of slowing won

appreciation against the dollar, although these purchases were partially reversed

through foreign exchange sales in February. The IMF continues to describe Korea’s

current account surplus as larger, and its exchange rate as weaker, than justified by

medium-term economic fundamentals. Further, despite real effective appreciation in

2017 of 3.6 percent, the won is not notably strong compared to levels it has been over

the last couple decades. It is important that the Korean authorities act to strengthen

domestic demand and avoid reverting to excessive reliance on external demand for

growth. Treasury will continue to monitor closely Korea’s currency practices and urges

the authorities to report its exchange rate intervention in a transparent and timely

manner. 

 

• India increased its purchases of foreign exchange over the first three quarters of 2017. 

Despite a sharp drop-off in purchases in the fourth quarter, net annual purchases of

foreign exchange reached $56 billion in 2017, equivalent to 2.2 percent of GDP. The

pick-up in purchases came amidst relatively strong foreign inflows, both of foreign

direct investment and portfolio investment. Notwithstanding the increase in

intervention, the rupee appreciated by more than 6 percent against the dollar and by

more than 3 percent on a real effective basis in 2017. India has a significant bilateral

goods trade surplus with the United States, totaling $23 billion in 2017, but India’s

current account is in deficit at 1.5 percent of GDP and the exchange rate is not deemed

to be undervalued by the IMF. Given that Indian foreign exchange reserves are ample

by common metrics, and that India maintains some controls on both inbound and

outbound flows of private capital, further reserve accumulation does not appear

necessary. 

• Germany has the world’s largest current account surplus in nominal dollar terms,

$299 billion in 2017, and has had the world’s largest surplus in most years since 2011. 

There has been little to no progress in reducing this massive surplus the past three

years, in part because domestic demand in Germany has not been sufficiently strong to

facilitate external rebalancing and because Germany’s low inflation rate has contributed

to a weak real effective exchange rate. As it now stands, these surpluses represent a

substantial excess of income over spending, which translates into weaker imports by

Germany than could be, and thus very large capital outflows. As noted in Annex I,

Germany’s accumulation of foreign assets has increased markedly over the last ten

years as a result of these large and persistent surpluses. Among these large surpluses is

a sizable bilateral goods trade surplus with the United States, at $64 billion over the

four quarters through December 2017. Germany should take policy steps to unleash

domestic investment and consumption – including meaningful fiscal reforms to

minimize burdens from elevated labor and value-added taxes – which would narrow

the gap between domestic income and spending and help reduce large external
5

imbalances. The European Central Bank (ECB) has not intervened unilaterally in

foreign currency markets in over 15 years.4 

• Switzerland’s foreign exchange purchases, which had been used persistently over the

past few years to help counter pressures from safe haven inflows and deflationary

forces, declined notably over the last three quarters of 2017. Treasury estimates that

net annual purchases of foreign exchange in 2017 totaled $44.9 billion, equivalent to 6.6

percent of GDP. Treasury estimates that purchases in the first quarter of 2017

accounted for almost all of the annual total. The Swiss franc depreciated in both

nominal and real effective terms over the second half of the year, with the real effective

exchange rate ending 2017 less than 3 percent above its 20-year average level. 

Switzerland had a very large current account surplus at 9.8 percent of GDP over the

four quarters through December 2017. To help narrow the large and persistent trade

and current account surpluses, Switzerland should adjust macroeconomic policies to

more forcefully support domestic economic activity. Further, with inflation having

turned positive in 2017 and safe haven capital inflow pressures having abated, the

current window offers an opportunity to consider how to unwind the large stock of

foreign assets the central bank has accumulated on its balance sheet over the last few

years. Treasury also urges the Swiss authorities to enhance the transparency of

exchange rate intervention.

Treasury continues to track carefully the foreign exchange and macroeconomic policies of

its trading partners, and is considering whether a future expansion in the number of

economies covered in this Report to include more economies as ‘major trading partners’

would be helpful in achieving the Administration’s objectives of more fair and reciprocal

trade and stronger, more balanced global growth.

 4 For the purposes of Section 701 of the 2015 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. 
6

Section 1: Global Economic and External Developments

This Report covers economic, trade, and exchange rate developments for the last six

months of 2017 and, where data are available, developments through end-March 2018. 

This Report covers developments in the 12 largest trading partners of the United States, as

well as Switzerland, which is currently the United States’ 15th largest trading partner.5 

These economies’ total goods trade with the United States amounted to $2.8 trillion over

the four quarters through December 2017, over 70 percent of all U.S. goods trade during

that period. For some parts of the analysis, especially those parts having to do with Section

701 of the 2015 Act, data over the most recent four quarters for which data are available

are considered (typically up through the fourth quarter of 2017). 

U.S. Economic Trends

The U.S. economic expansion picked up speed in the second half of 2017, growing at an

annual rate of 3.0 percent, compared with 2.1 percent in the first half, and pushing through

the serious hurricanes and wildfires of the third quarter. Growth of private domestic final

demand remained strong in the latter half of the year, rising by 3.5 percent compared with

a rate of 3.2 percent in the first half of 2017. When measured on a year-over-year basis, the

U.S. economy’s growth has strengthened every quarter since mid-2016, and the recovery

has now entered its ninth consecutive year.

The underpinnings of growth remain sound and include a healthy pace of job creation,

strong labor markets, positive consumer sentiment, solid household finances, and an

upbeat outlook for business activity. These factors boosted private domestic demand to a

4.8 percent pace in the final quarter of 2017, an acceleration that likely augurs well for

private demand in coming quarters. Inflation ticked up but remained moderate, and

interest rates, including mortgage rates, held mostly steady through the second half of

2017. As of early April 2018, a consensus of private forecasters predicted that real GDP

would expand at a rate of 2.8 percent in 2018, measured on a year-over-year basis. 

Recent U.S. Growth Performance

Real GDP expanded at an average annual rate of 3.0 percent over the second half of 2017,

accelerating noticeably from the 2.1 percent rate in the first half of the year. Domestic final

demand firmed further, and in the fourth quarter of 2017, reached its fastest pace in three

years. Consumer spending contributed 2.1 percentage points to GDP growth in the second

half of 2017, a bit higher than the 1.8 percentage points added in the first half of 2017. 

Business fixed investment contributed 0.7 percentage point to growth in the second half of

2017, a tick lower than the 0.8 percentage point addition made in the first half of the year. 

Residential investment made a modest contribution of roughly 0.1 percentage point in each

half of the last year. Net exports posed a drag on growth of 0.4 percentage point in the

 5 Switzerland is included in this Report as it has previously appeared on Treasury’s Monitoring List in the

October 2016, April 2017, and October 2017 Reports.
7

second half of 2017, after making a 0.2 percentage point addition to growth in the first half

of the year. Inventory accumulation added 0.1 percentage point to growth in the final two

quarters of 2017, after subtracting 0.7 percentage point from growth in the first two

quarters of the year. Government spending had held down growth by 0.1 percentage point

in the first half of 2017, but contributed 0.3 percentage point in the second half of 2017.

Sound Fundamentals

Payroll employment continued to grow at a firm pace in 2017, and the unemployment rate

fell further. Nonfarm payroll employment added 182,000 jobs per month, on average,

during 2017. Over the first three months of 2018, however, the average pace increased to

202,000 per month. The unemployment rate stands at 4.1 percent as of March 2018, a

seventeen- year low, and well below the 10 percent peak of 2009. Other measures of labor

market conditions continue to improve, including signs of faster growth in wages and

further declines in the rates of long-term unemployment as well as involuntary part-time

employment.

Measures of consumer mood remain near multi-year highs according to recent surveys,

with households continuing to express positive views about current economic conditions. 

Compensation growth has begun to firm recently: average hourly earnings for production

and nonsupervisory workers rose 2.4 percent over the twelve months through March

2018, stepping up from the rates that prevailed from 2011 through 2015 and accelerating

from the pace seen in the second half of 2017. Total compensation costs for civilian

workers advanced 2.6 percent over the four quarters ending in December 2017, 0.4

percentage point higher than the year-earlier pace. Moreover, the debt-service ratio facing

households is near historical lows, and household net worth stands at a record high. 

Business activity is also expanding at a healthy pace. According to the most recent survey

of the Institute for Supply Management (ISM) in March, the composite index for the

manufacturing sector remains near the seventeen-year high in February. Seventeen of 18

industries reported expansion, while only one industry reported contraction. The ISM’s

non-manufacturing index also pointed to faster expansion in the services sector in March,

remaining close to the twelve-year high reached in January. After several weak quarters in

2015 and early 2016, business fixed investment began firming last year, growing at 6.9

percent in the first half of the year and 5.6 percent in the second half.

Although headline inflation turned up in mid-2016 with the recovery in energy prices, a

pullback in oil prices caused a deceleration starting in spring 2017 that continued for much

of last year. The consumer price index (CPI) for all items rose 2.4 percent over the twelve

months through March 2018, matching the rate seen over the year through March 2017. 

Growth in the core CPI (which excludes food and energy prices) has been stable and

relatively low, but in March 2018 moved up to 2.1 percent, above the 2.0 percent rate seen

over the year through March 2017. 
8

Fiscal Policy and Public Finances

In December 2017, the United States enacted the first major re-write of the U.S. tax code in

three decades. The new tax code is designed to markedly strengthen incentives for

business investment and to deliver tax relief to middle income households. The new tax

law lowered the U.S. corporate tax rate from one of the highest in the developed world to

near the average of other advanced economies; it allows businesses to immediately deduct

100 percent of the cost of most of their new capital investments for the next five years; and

it delivers relief to working families through lower income tax rates, a larger standard

deduction, and an expanded child tax credit. Combined with regulatory reforms and

infrastructure initiatives, tax reform should encourage people to start new businesses,

draw workers into the labor market, and support a sustained increase in productivity. 

The Administration’s FY 2019 Budget, released in February, aims to expand economic

growth while trimming wasteful spending and putting the United States on a sustainable

fiscal path over the medium term. In particular, the Administration’s Budget proposal

would restrain non-defense discretionary spending relative to current baseline levels, with

the addendum to the Administration’s Budget targeting a lower level of non-defense

discretionary spending in FY 2019 than envisioned under the Bipartisan Budget Act of

2018 signed in February of this year. As a result, the Administration’s FY 2019 Budget (as

addended) projects that the Federal government budget deficit will rise to above 4 percent

of GDP in FY 2018 (up from 31⁄2 percent of GDP in FY 2017) and then peak as a share of

output at around 5 percent of GDP in FY 2019 before decreasing steadily thereafter. The

Administration expects federal debt held by the public to rise from 77 percent of GDP at the

end of FY 2017, to above 80 percent of GDP in FY 2022, before gradually declining

thereafter. 

U.S. Current Account and Trade Balances

The U.S. current account was in deficit by 2.3 percent of GDP in the second half of 2017,

shrinking modestly from 2.5 percent of GDP in the first half of 2017. This narrowing of the

current account deficit was driven primarily by the income balance, as the primary income

surplus grew by $14 billion in the second half of 2017 compared to the first half of the year. 

A slight deterioration of the trade balance (both for goods and services) offset a portion of

the larger income surplus.

After narrowing in the postcrisis era to just below 2 percent

of GDP in the second half of

2013, the headline U.S. current

account deficit has been quite

stable since 2015 in the ballpark

of 21⁄2 percent of GDP. Similarly,

the goods trade balance has been

relatively stable in recent years,

in the range of 4-41⁄2 percent of

-5

-4

-3

-2

-1

0

1

2

3

H1 2011H2 2011H1 2012H2 2012H1 2013H2 2013H1 2014H2 2014H1 2015H2 2015H1 2016H2 2016H1 2017H2 2017

Percent of GDP

U.S. Current Account Balance

Income Services Goods Current Account Balance

Sources: Bureau of Economic Analysis, Haver
9

GDP. But significant shifts have

occurred within the goods

balance. The U.S. petroleum

deficit has fallen to its lowest

level in decades – it averaged 0.2

percent of GDP in the second half

of 2017 – due to higher domestic

production and also supported

by the lower level of oil prices

since 2014. The non-oil goods

deficit, by comparison, is now

approaching its peak historical

levels: whereas as recently as

2013 the non-oil goods balance remained below 3 percent of GDP, it has steadily widened

over the last four years and in the fourth quarter of 2017 grew beyond 4 percent of GDP for

the first time since 2006. This deterioration in the non-oil goods balance has been driven

by strong import growth combined with very sluggish export growth.6 This pattern of

strong imports and weak exports has reflected relatively stronger domestic demand

growth in the United States compared to its recent trading partners over the last few years,

as well as the impact of the broad strengthening of the dollar from 2014 to early 2017.

At the end of 2017, the U.S. net international investment position stood at a deficit of $7.8

trillion (40.5 percent of GDP), an improvement of more than $470 billion compared to end2016. The value of U.S.-owned foreign assets was $27.6 trillion, while the value of foreignowned U.S. assets stood at $35.5 trillion. Recent improvement in the net position has been

supported by valuation effects (e.g., euro appreciation) that increased the dollar value of

U.S. assets held abroad, as well as the strong relative performance of foreign equity

markets in 2017, which also boosted the value of U.S. assets held abroad.

International Economic Trends

The global economy in 2017 achieved its strongest expansion since 2011. The nascent

global pickup evident early in 2017 took hold firmly as the year progressed, with secondhalf growth accelerating particularly in the United States and Asia. Over the whole of 2017,

Europe experienced a strong, synchronized expansion, reflecting delayed catch-up after

years of lethargic post-crisis growth. Buoyed by stronger-than-expected growth in China

and a pick-up in investment, global trade expanded by 4.7 percent in volume terms in 2017,

nearly double the pace of growth in 2016. Major economies also saw substantial gains in

employment, with unemployment rates in the United States, Japan, and the United

Kingdom now below their pre-crisis levels and the euro area having made substantial

progress toward pre-crisis rates. The cyclical upswing is helping narrow output gaps that

have lingered since the global financial crisis, with the World Bank forecasting that the

 6 Comparing the second half of 2017 to the second half of 2013, nominal U.S. goods imports excluding

industrial supplies grew by almost 17 percent, whereas nominal U.S. goods exports excluding industrial

supplies expanded by less than 2 percent.

-7

-6

-5

-4

-3

-2

-1

0

2006 2008 2010 2012 2014 2016

Percent of GDP

U.S. Goods Balance

Non-Oil Balance

Oil Balance

Source: Bureau of Economic Analysis
10

global output gap will close in

2018. Responding to the strong

momentum in the global

economy, forecasters have raised

their near-term growth

projections: the IMF in January

upgraded its global growth

forecast to 3.9 percent for both

2018 and 2019, with a large

portion of the upward revision

attributable to positive spillovers

from the recent U.S. tax reform

legislation.

The medium-term outlook for the global economy, however, is clouded by several

challenges. Wage growth (in nominal and real terms) in many economies remains muted,

which has been one contributing factor to persistently low global inflation. Lackluster

productivity growth has dampened upward pressures on both wages and inflation. 

Further, while growth in business investment strengthened notably among advanced

economies in 2017, the level of investment (as a share of GDP) remains quite weak among

advanced economies compared to pre-crisis levels. Reviving business investment and

raising productivity growth would help entrench growth over the medium term and

support stronger expansion of median incomes.

Global Imbalances

Global current account imbalances narrowed marginally in 2017, coming down to 1.7

percent of global GDP, the lowest level since 2003. As discussed in Annex I, however,

imbalances remain large from a longer run perspective: prior to 2000, there was no period

in the last several decades during which imbalances had reached 2 percent of global GDP. 

Further, the post-crisis landscape has been marked by persistent and concentrated

imbalances, particularly in the surplus economies of Asia and northern Europe. In part,

this has reflected a rotation of surpluses from oil exporting economies (as global energy

prices fell) into oil-importing industrial economies. 

Beyond the recent shift in terms of trade, the persistence of imbalances has also reflected

the failure of real exchange rates and domestic demand to promote symmetric global

adjustment. The composition of global growth in recent years bears out this asymmetry:

Asian and European economies, where persistent surpluses are concentrated, relied

heavily on positive contributions from net exports to drive growth between 2010 and

2015. Growth in North and Latin America since the crisis, by comparison, has been led by

domestic demand, with the strengthening of U.S. demand being central to the recent global

growth uptick. In order to reduce the risk of a future adjustment in external balances that

weighs on global growth, major economies need to put in place a more symmetric

rebalancing process that entails all economies carrying a share of the adjustment.

0

3

6

9

India

China

Taiwan

Korea

United States

Germany

Switzerland

France

Canada

Japan

UK

Italy

Brazil

Mexico

Percent change (annualized rate)

GDP Growth

H1 2017 H2 2017

Sources: National Authorities, Haver
11

Looking over the last three years, most of the United States’ major trading partners have

seen current account imbalances widen, though with some notable exceptions. Among

surplus economies, both China and Korea saw smaller surpluses in 2017 than in the recent

past, while deficits have narrowed in a few economies.

A more in-depth discussion of the global adjustment process can be found in Annex I.

-4

-3

-2

-1

0

1

2

3

4

1980198219841986198819901992199419961998200020022004200620082010201220142016

Percent of Global GDP

Global Current Account Imbalances

China Germany Japan

Other Surplus United States Other Deficit

Statistical Discrepancy

Sources: IMF WEO, Haver

Brazil

India China

Mexico

Germany

Canada

Italy

Japan

Korea

France Switzerland

Taiwan

U.K.

U.S.

-3

-2

-1

0

1

2

3

4

5

-10 -5 0 5 10 15

3-Year Change in Balance (% of GDP)

Sources: Haver, IMF WEO, National Authorities

Note: Size of bubble is relative to share of global imbalances

Global Current Account Balances - Adjustment 2014-2017 

2017 Current Account Balance (% of GDP)

Shrinking CA Deficit Growing CA Surplus

Growing CA Deficit Shrinking CA Surplus
12

-1000

-800

-600

-400

-200

0

200

400

600

20002001200220032004200520062007200820092010201120122013201420152016

YTD 2017

USD Billions

Net Capital Flows to Emerging Markets

EM excluding China China

Note: Financial account (excluding reserves) adjusted for errors and ommissions. 

2017 reflects data through the first three quarters.

Source: National Authorities, U.S. Department of the Treasury Staff Calculations

Capital Flows

Following three years of sizeable

outflows, private net capital flows

out of China slowed significantly

in 2017. Although China

remained a net capital exporter

over the first three quarters of

2017, stronger-than-expected

domestic growth, tighter capital

controls, and a more balanced

renminbi outlook helped stem

resident outflows while boosting

foreign inflows. Elsewhere,

private capital continued leaving

emerging markets, albeit at a slightly slower pace than in prior years. 

Aggregate net direct investment inflows to emerging markets were roughly 30 percent

higher over the first three quarters of 2017 than during the same timeframe in 2016. China

and Indonesia both saw an increase in net direct investment inflows over the prior year, as

did several smaller economies undertaking structural reforms (Lithuania, Pakistan, Serbia,

Georgia). 

Portfolio outflows from emerging markets – also a key characteristic of capital flow trends

in recent years – declined substantially in the first three quarters of 2017. Notably, several

major emerging market economies saw an increase in positive net portfolio inflows,

including China (registering the first positive net inflow since 2014), India, Russia, and

Turkey.

A more in-depth discussion of global capital flow trends can be found in Annex I.

Foreign Exchange Markets

The U.S. dollar depreciated by 6 percent on a nominal effective basis in 2017, the largest

annual decline in a decade. After strengthening markedly in 2016, the dollar fell gradually

over the first three quarters of 2017 as growth in major foreign economies accelerated,

expectations for the timing of monetary policy normalization in Europe and the United

Kingdom were brought forward, and prospects for U.S. tax reform appeared to waver

temporarily in the middle of the year. The dollar rebounded modestly in the fourth

quarter, as growing expectations for higher U.S. interest rates and ultimate passage of U.S.

tax reform supported the dollar. On net, the dollar appreciated 1.7 percent in the fourth

quarter, trimming the dollar’s 7.5 percent nominal effective decline over the first nine

months of the year.
13

The dollar’s nominal decline in

2017 reflected a broad

depreciation against both major

and emerging market currencies. 

Notably, the dollar depreciated

against the euro amid

strengthening European growth

and shifting expectations for the

potential timeline for policy

normalization by the European

Central Bank. The dollar fell

against the British pound and the

Canadian dollar as the central

banks in both those economies raised interest rates in response to rising inflation and

positive growth momentum. The dollar also depreciated notably against key emerging

market currencies in Asia, as those economies benefitted from the synchronized global

growth upswing and related pickup in global trade.

The nominal dollar decline was closely mirrored by a depreciation in the real tradeweighted dollar (which adjusts for relative price inflation). In real effective terms, the

dollar depreciated 6.8 percent over 2017, ending the year at a level in line with its 20-year

average. Among the United States’ major trading partners, real effective exchange rates

appreciated across much of Europe and emerging Asia (excluding China), and declined in

some key surplus economies (China, Japan, and Switzerland) and the United Kingdom. 

Looking across changes in the real effective exchange rates during 2017, few economies

saw their currencies move in a direction that corrected for pre-existing misalignments. 

Compared to the IMF’s exchange rate assessment in its 2017 External Sector Report,

misalignment widened particularly for Switzerland and Japan; in Japan’s case, the real

effective rate declined in 2017 to nearly 25 percent below its 20-year average.

Treasury judges that foreign exchange markets continued to function smoothly over the

course of 2017, including as the Federal Reserve raised the interest rate corridor three

times (March, June, and December) and began reducing the size of its balance sheet. The

dollar continues to be the world’s principal currency in international foreign exchange

markets, reflecting its dominant global position both in terms of market turnover (being

bought or sold in 88 percent of all currency trades) and trade settlement.7

Foreign Exchange Reserves

Global foreign currency reserves increased by $711 billion over 2017, reaching more than

$11.4 trillion as of December. The net reserve accumulation over the past year reversed a

portion of the preceding multi-year decline (nearly $1.3 trillion between mid-2014 and the

 7 Currency market turnover according to the 2016 Bank for International Settlement Triennial Central Bank

Survey of Foreign Exchange and OTC Derivatives.

-15 -10 -5 0 5

Brazil

Japan

Switzerland

Mexico

India

China

Canada

Taiwan

UK

Korea

Euro

Sources: FRB, Haver Percent change (CY 2017)

U.S. Dollar vs. Major Trading Partner Currencies

(+ denotes dollar appreciation)
14

end of 2016) that was associated with many economies’ reserve asset sales to stem or slow

local currency depreciation. The majority of the increase in global reserves took place in

the first half of 2017, coinciding with the largest sustained decline in the dollar. On net, the

majority of the increase in headline reserves in 2017 was due to valuation effects. 

At an individual level, the increase in

headline reserves was concentrated

among several economies included in

this Report. Switzerland’s reserves

increased by $130 billion on net in

2017, the majority of which took place

in the first half of the year (in part

because the dollar value of its euro

holdings increased), while China’s

reserves expanded by nearly $130

billion over the year. Changes in

headline reserve levels in these

economies reflected primarily

valuation changes rather than

(estimated) foreign exchange

intervention.

The economies covered in this Report continue

to maintain ample – or more than ample –

foreign currency reserves compared to standard

adequacy benchmarks.8 Reserves in most

economies are more than sufficient to cover

short-term external liabilities and anticipated

import costs. Excessive reserve accumulation

imposes costs both on the local economy (in

terms of sterilization costs and foregone

domestic investment) and the world. Economies

should focus on enhancing resilience through

stronger policy frameworks, as recommended by

the IMF, rather than through continued reserve

accumulation.9

 8 “Annex I: Foreign Exchange Reserves – Recent Developments and Adequacy Measures,” Report to Congress

on Foreign Exchange Policies of Major Trading Partners of the United States (October 2017).

9 International Monetary Fund, 2011, “Assessing Reserve Adequacy,” IMF Policy Paper, February

(Washington: International Monetary Fund).

-100 0 100 200 300 400 500 600 700

World

Switzerland

China

Japan

India

Brazil

UK

Korea

Taiwan

Italy

Canada

Germany

France

Mexico

USD Billions

(Change 2017)

H1 2017 H2 2017

Note: Includes valuation effects

Sources: International Monetary Fund, Haver

Change in Foreign Currency Reserves

FX Reserves 

(% of GDP)

FX Reserves 

(% of ST debt)

Switzerland 112% 72%

Taiwan 80% 278%

China 26% 307%

Korea 25% 319%

Japan 25% 45%

Brazil 18% 687%

India 15% 415%

Mexico 14% 321%

Canada 5% 13%

UK 5% 2%

Italy 2% 4%

France 1% 2%

Germany 1% 2%

Foreign exchange reserves as of Dec 2017.

Sum of rolling 4Q GDP through Q4-2017.

Sources: National Authorities, World Bank, IMF

Table 1: Foreign Exchange Reserves

Short-term debt consists of gross external debt 

with original maturity of one year or less, as of the 

end of Q3-2017.
15

Economic Developments in Selected Major Trading Partners

China

China’s goods trade surplus with the United States amounted to $375 billion in 2017, by far

the largest of any major trading partner of the United States. Treasury is strongly

concerned by the lack of progress by China in correcting the bilateral trade imbalance and

urges China to create a more level and reciprocal playing field for American workers and

firms. Further opening of the Chinese economy to U.S. goods and services, as well as

reducing the role of state intervention and allowing a greater role for market forces, would

provide more opportunities for American firms and workers to compete in Chinese

markets and facilitate a reduction in the bilateral trade imbalance. These adjustments

should be paired with macroeconomic reforms that support greater consumption growth

in China.

The growth in China’s goods surplus with the United States accelerated in the second half

of 2017, expanding by $18.4 billion relative to the same period in 2016 to reach $205

billion. Despite the growth in U.S. exports of agricultural products, oil and gas, and

chemicals to China, growth in overall U.S. exports to China moderated in the second half of

2017. U.S. imports from China picked up, driven almost entirely by sharp increases in

computer, computer accessory, and cell phone imports. The U.S. services trade surplus

with China grew slightly over the previous year to reach $38.5 billion by the end of 2017. 

In contrast to the large bilateral

surplus with the United States,

China runs trade deficits with

many other economies, and as

such, has a smaller overall trade

and current account surplus. 

China’s current account surplus

expanded in nominal terms in

the second half of 2017 to $96

billion (1.4 percent of GDP) from

$90 billion (1.5 percent of GDP)

in the second half of 2016, but it

remains significantly below its

2007 half year peak of over 10 percent of GDP. Of the $6 billion increase, the largest share

($5 billion) reflected an increase in overseas investment income. The goods trade surplus

expanded modestly by around $2 billion, as increased exports were largely matched by

increased imports. 

Treasury places significant importance on China adhering to its G-20 commitments to

refrain from engaging in competitive devaluation and to not target China’s exchange rate

for competitive purposes; and on greater transparency of China’s exchange rate and

reserve management operations and goals. Over 2017, the Chinese currency generally

moved against the dollar in a direction that should, all else equal, help reduce China’s trade

-5

0

5

10

20072008200920102011201220132014201520162017

Percent of GDP

China: Current Account Balance

Income Services Goods Current Account Balance

Sources: SAFE, Haver
16

surplus with the United States;

however, on a broad, tradeweighted basis the RMB was

broadly unchanged on net over

2017. More recently, since the

beginning of 2018, the renminbi

(RMB) has continued to

strengthen against the dollar, up

3.7 percent as of end-March

2018, while it has appreciated

2.0 percent against China’s

CFETS nominal basket.10

Despite some recent appreciation, China’s real effective exchange rate remains over 6

percent below its peak level in mid-2015. The decline in the real effective exchange rate

since 2015 broke a general trend of the RMB strengthening on a real effective basis over

the previous two decades. China’s real effective exchange rate appreciated from 1995 to

2002 but declined from 2002 through 2005, contributing to record current account

surpluses in 2005 -2007. The RMB resumed its appreciation trend in 2005 when the

central bank eliminated the RMB’s peg to the dollar. As of February 2018, the RMB on a

real effective basis is more than 25 percent above its 20-year average and 44 percent above

where it stood in July 2005. 

After significant capital outflows since late 2015 over concerns related to China’s slowing

growth and financial stability risks, the pace of capital outflows from China slowed in 2017. 

Broad U.S. dollar weakness, an improved near-term Chinese economic growth outlook, and

higher interest rate differentials likely contributed to the relative stabilization of the

currency and to a decline in net Chinese capital outflows. The reduction in outflows was

also likely aided by a tightening of certain capital controls, for example, revised sectoral

restrictions on overseas direct investment by Chinese state-owned enterprises. Treasury

estimates that, in the second half of 2017, net outflows (excluding the trade surplus and net

direct investment inflows) declined to an estimated $140 billion, compared to $350 billion

during the same period in 2016.

China does not publish its foreign exchange market intervention, but Treasury estimates

that Chinese authorities significantly curtailed intervention in the second half of 2017 that

they had been undertaking to support the value of the RMB. Foreign exchange reserves

sold in the second half of the year are estimated at $6 billion, a significant decline

compared to estimated sales of close to $250 billion during the second half of 2016. As of

March 2018, Chinese foreign exchange reserves were valued at $3.1 trillion, which is above

standard measures of reserve adequacy.

 10 The China Foreign Exchange Trade System (CFETS) RMB index is a trade-weighted basket of 24 currencies

published by the People’s Bank of China.

86

90

94

98

102

106

Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17

Indexed December 2014 = 100

China: Exchange Rates

CFETS CNY/USD (Daily Close)

Sources: CFETS, Bloomberg
17

Real GDP in the second half of

2017 grew 6.8 percent relative to

the same period in 2016, slightly

lower compared to growth of 6.9

percent in the first half of 2017,

but higher than the annual rate

of 6.7 percent in 2016. Economic

momentum has remained solid

despite monetary and financial

regulatory tightening, as fiscal

policy and strong external

demand have been supportive of

growth. Though consumption

represented the largest contributor to China’s economic growth in the second half of 2017,

indicating some progress toward rebalancing the economy, it continues to represent a

relatively low share of GDP relative to fixed investment. Higher frequency data suggest

that economic momentum is slowing at a moderate pace, given the slowdown in credit

expansion – particularly shadow credit growth – as a result of the needed deleveraging

campaign to address financial stability risks. Treasury staff estimate that total nominal

credit growth, after factoring in local government bond swaps and shadow credit activity,

was close to 13 percent in February 2018, suggesting that credit buildup is still outpacing

nominal economic growth. Meanwhile, new lending to the real economy remains strong

due to corporate and household borrowing.

Japan

Japan’s current account surplus

increased to $197 billion in 2017

(4 percent of GDP) from $189

billion in 2016 (3.8 percent of

GDP). The elevated current

account surplus continues to be

driven primarily by high net

foreign income, which accounted

for over 80 percent of the overall

surplus in 2017. Many past

years of surpluses have

produced sizable net foreign

assets: Japan’s net international investment position stood at 64 percent of GDP in 2017,

the highest in the G-7, and the IMF projects it will rise to 80 percent of GDP in the medium

term, suggesting sizable net foreign income flows for years to come. These foreign income

flows are potential spendable income that could be used to bolster demand growth and

help reduce Japan’s sizeable current account surplus.

Japan’s bilateral goods trade surplus with the United States has been roughly steady for the

past four years, coming in at nearly $70 billion in 2017. Japan ran a services trade deficit

-3

0

3

6

20072008200920102011201220132014201520162017

Percent of GDP

Japan: Current Account Balance

Income Services Goods Current Account Balance

Sources: Bank of Japan, Ministry of Finance, Cabinet Office 

-150

-100

-50

0

50

Jan-15

Apr-15

Jul-15

Oct-15

Jan-16

Apr-16

Jul-16

Oct-16

Jan-17

Apr-17

Jul-17

Oct-17

Jan-18

Billion U.S. Dollars

China: Estimated FX Intervention

Preferred Methodology* Bank FX Settlement

Sources: PBOC, SAFE, U.S. Treasury Estimates

*Based on change in FX-denominated assets on PBOC balance sheet
18

with the United States of $13.6 billion, resulting in an overall trade surplus (goods plus

services, seasonally adjusted) of $56 billion in 2017, slightly lower than the previous year. 

Treasury remains concerned by the persistence of this large bilateral trade imbalance

between the United States and Japan.

Both inflation and growth picked up in 2017. Year-over-year inflation reached 1 percent at

the end of 2017, an improvement from 0.3 percent at the end of 2016, though still well

below the target of two percent. The Bank of Japan (BOJ) has maintained a policy of

“Quantitative and Qualitative Easing with Yield Curve Control” since September 2016. The

BOJ maintains the overnight policy rate at negative 10 basis points and purchases Japanese

Government Bonds so that the 10-year yield remains “around” zero percent. In order to

maintain that target on 10-year yields as upward pressure on yields increased, the BOJ

announced on four occasions “fixed-rate purchase operations”, in which the Bank pledged

to buy unlimited amounts of specific Japanese Government Bonds within a particular

maturity range. 

Real growth, meanwhile, nearly doubled from its 2016 pace of 0.9 percent to 1.7 percent in

2017. This marked eight consecutive quarters of economic growth, Japan’s longest

expansion in nearly thirty years. But the underpinnings of growth are not yet broad-based. 

Exports were a main driver of economic growth in 2017 – supported by the improved

global environment – and while domestic demand picked up, the economy remains

vulnerable to a slowdown in private consumption. 

The improvement in growth and

inflation in 2017 helped drive a

modest nominal appreciation of

the yen, which strengthened 3.6

percent against the dollar over

the year. The yen appreciated

further against the dollar in early

2018, moving up 6.1 percent

from January through endMarch. Safe-haven inflows amid

heightened geopolitical tensions

have played a role in recent

nominal appreciation. On a real effective basis, however, the yen depreciated by 2.4

percent from the start of 2017 through February of this year. This brought the real

effective exchange rate to nearly 25 percent below its 20-year average. Viewed over the

horizon of the last decade, the nominal exchange rate has been weaker than historical

average levels since the first half of 2013. 

Looking forward to reforms that could entrench stronger growth, the authorities should

aim in the interim fiscal review they are conducting this year to pursue necessary fiscal

consolidation – gross public debt reached 240 percent of GDP in 2017 – over the medium

term in a manner that minimizes any negative impacts on overall growth. 

60

80

100

120

140

60

80

100

120

140

Dec-05Dec-06Dec-07Dec-08Dec-09Dec-10Dec-11Dec-12Dec-13Dec-14Dec-15Dec-16Dec-17

Indexed to 20Y Avg = 100

Japan: Exchange Rates

REER NEER JPY/USD

Sources: Bank of Japan, Bank for International Settlements
19

-5

0

5

10

200720082009

2010201120122013201420152016

2017

Percent of GDP

Korea: Current Account Balance

Income Services Goods Current Account Balance

Sources: Bank of Korea, Haver

Korea

Korea’s current account surplus

declined from 7 percent of GDP

in 2016 to 5.1 percent of GDP in

2017. Domestic demand

expanded by more than 5

percent, its fastest pace since

2010, which helped prompt a

notable widening of the services

trade deficit. Notwithstanding

this pick-up in domestic demand,

however, there has been

relatively limited adjustment in

the last couple years in Korea’s goods trade surplus, which remains very high at nearly 8

percent of GDP. The IMF in its most recent analysis continued to describe Korea’s current

account surplus as stronger than justified by medium-term fundamentals. 

Korea’s goods trade surplus with the United States remains high at $23 billion in 2017,

though down from $28 billion in 2016. Most of the decline between 2016 and 2017

occurred because Korea’s bilateral trade surplus had ballooned through the first half of

2016; the progress on reducing the bilateral trade surplus has been more modest over the

last 18 months. The United States runs a services surplus with Korea, so Korea’s overall

goods and services trade surplus was lower at $10.3 billion in 2017. 

Korea does not publish its

foreign exchange market

intervention. Treasury estimates

that in 2017 Korean authorities

made net purchases of foreign

exchange of $9 billion (0.6

percent of GDP), including

activity in the forward market.

Much of this occurred in the last

six months of 2017 when the

won appreciated 7.2 percent

against the dollar and 1.8

percent on a real effective basis.

In response to this appreciation pressure, Korea’s foreign exchange intervention picked up

between November 2017 and January 2018, totaling $10 billion during that timeframe. A

small portion of these foreign exchange purchases were reversed in February 2018, as the

Bank of Korea’s net forward position fell by $3 billion and the won depreciated by 1.8

percent on a real effective basis. 

-10

-5

0

5

10

Jan-16

Apr-16

Jul-16

Oct-16

Jan-17

Apr-17

Jul-17

Oct-17

Jan-18

Billion U.S. Dollars

Korea: Estimated FX Intervention

Est. Spot Market Intervention Change in Net Forward Book

Sources: Bank of Korea, U.S. Treasury estimates
20

The IMF has considered the

Korean won to be undervalued

every year since 2010, and in its

most recent evaluation

considered the won to be

undervalued by 1-12 percent. In

terms of evaluation, Korea has

well-developed institutions and

markets and should limit

currency intervention to only

truly exceptional circumstances

of disorderly market conditions. 

Korea maintains ample reserves

at $386 billion as of January 2018, equal to more than three times gross short-term

external debt and 25 percent of GDP. Treasury also urges the authorities to promptly begin

reporting foreign exchange intervention in a transparent and timely manner.

Though Korea’s external position has adjusted somewhat since the peak of the current

account surplus in 2015, there remains scope for policy reforms that would support a more

durable strengthening of domestic demand. Korea was strongly reliant on external

demand in the first few years after the global financial crisis, with net exports accounting

for more than one-third of cumulative growth over 2011-2014. Since 2015, however,

domestic demand has been stronger, averaging above 4 percent growth annually and

expanding faster than overall growth. This trend will need to be continued for a few years

in order to decisively rebalance the economy and reduce the still-large trade and current

account surpluses. Korea maintains sufficient policy space to support domestic demand,

particularly as public sector debt remains relatively low at around 40 percent of GDP. A

significantly more expansionary fiscal policy would help support the recovery and reduce

external imbalances. Increased social spending, which remains well below most other

OECD economies, could be particularly helpful for supporting stronger domestic

consumption.

India

India’s current account deficit widened modestly in 2017 to 1.5 percent of GDP, following

several years of narrowing from its 2012 peak. The current account deficit has been driven

by a large and persistent goods trade deficit, which has in turn resulted from substantial

gold and petroleum imports. The goods trade deficit has fallen over the last few years as

policy changes limited gold imports and the decline in oil prices narrowed the oil balance

from 2014, though the goods trade deficit widened in 2017 to 5.9 percent of GDP. The IMF

projects the current account deficit to widen to about 2 percent of GDP over the medium

term as domestic demand strengthens further and given the rebound in commodity prices. 

70

80

90

100

110

120

130

70

80

90

100

110

120

130

Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14

Jan-15

Jan-16Jan-17Jan-18

Indexed to 20Y Avg = 100

Korea: Exchange Rates

KRW/USD REER NEER

Sources: Bank of Korea, Bank for International Settlements
21

India’s goods trade surplus with

the United States was $23 billion

in 2017, the highest level on

record. Given that India also

runs a services surplus with the

United States of $6 billion, India’s

combined goods and services

trade surplus with the United

States was $28 billion in 2017. 

India’s exports to the United

States are concentrated in

sectors that reflect India’s global

specialization (notably

pharmaceuticals and IT services), while U.S. exports to India are dominated by key service

trade categories, particularly travel and higher education.

India has been exemplary in publishing its foreign exchange market intervention. 

According to the authorities’ data, India has generally been a net purchaser of foreign

exchange since late 2013, when the Reserve Bank of India (RBI) sought to build a stronger

external buffer in the wake of large emerging market outflows globally. Prior to 2013,

intervention for several years had generally been less frequent, and when it had occurred it

had been broadly symmetric, as for example during 2007 and 2008 when the RBI engaged

in both purchases and sales of foreign exchange at various points in the midst of volatile

global financial markets.

The RBI has noted that the value

of the rupee is broadly marketdetermined, with intervention

used only during “episodes of

undue volatility.” Foreign

exchange intervention picked up

in the first three quarters of

2017. According to the RBI’s

published intervention data, net

purchases of foreign exchange

over 2017 as a whole totaled $56

billion (2.2 percent of GDP),

including activity in the forward market. The increase in intervention came in the context

of strong capital inflows, with FDI of $34 billion and foreign portfolio flows of $26 billion

over the first three quarters of the year. This mirrored the pattern of the last few years, in

which intervention has typically tracked FDI and institutional portfolio flows.

Direct intervention has supported a steady increase in foreign exchange reserve levels. At

the end of 2013, foreign currency reserves were $268 billion, or 2.3 times short-term

external debt, 6 months of import cover, and 14 percent of GDP. Further, headline reserves

at end-2013 had been temporarily boosted through borrowed resources by mobilizing $34

-15

-10

-5

0

5

10

20072008200920102011201220132014201520162017

Percent of GDP

India: Current Account Balance

Income Services Goods Current Account Balance

Sources: Reserve Bank of India

-10

-5

0

5

10

15

Jan-2016

Apr-2016

Jul-2016

Oct-2016

Jan-2017

Apr-2017

Jul-2017

Oct-2017

Jan-2018

Billion U.S. Dollars

India: FX Intervention

Net Spot Market Intervention Change in Net Forward Book

Source: Reserve Bank of India
22

billion in three-year fixed term foreign currency deposits from non-resident Indians, which

rolled off the RBI’s foreign exchange portfolio as they matured. By comparison, at end2017 foreign currency reserves were valued at $385 billion, equal to 3.5 times gross shortterm external debt, 9 months of import cover, and 15 percent of GDP.11 India maintains

ample reserves according to IMF metrics for reserve adequacy, particularly given that India

maintains some controls on both inbound and outbound flows of private capital.

Notwithstanding the pick-up in

intervention, the rupee

appreciated 6.4 percent against

the dollar over 2017, while the

real effective exchange rate also

continued its general uptrend

from the last few years,

appreciating by 3.1 percent. In

its most recent analysis, the IMF

maintained its assessment that

the rupee is moderately

overvalued. The RBI’s most

recent annual report assessed the rupee to be “closely aligned to its fair value over the long

term.” 

The Euro Area and Germany

The euro area posted its strongest overall performance in a decade in 2017, exhibiting

broad-based output growth across both countries and sectors. That said, the cyclical

positions of individual member economies within the currency union remain widely

divergent, owing largely to differences in the depth and intensity of the impact of the euro

area crisis across various members and structural differences that affect competitiveness. 

This dynamic has weighed on the value of the euro, making the euro’s real effective

exchange rate appear undervalued for some of the strongest-performing individual

member countries in the currency union (e.g., Germany).

The euro has appreciated markedly over the past 12 months, but is not notably strong from

a historical perspective. Through the end of February 2018, the euro appreciated by 15.7

percent against the dollar year-over-year and 8.6 percent on a nominal effective basis. Real

effective appreciation over the same time period was more modest, at 5.7 percent through

end-February. Further, in spite of this recent appreciation, the euro remains 3 percent

weaker than its 20-year average in real effective terms, while it is roughly 1 percent

stronger on a bilateral basis against the dollar versus its 20-year average. The recent

strengthening of the euro follows several years of weakness, due initially to concerns about

the resilience of the monetary union in the midst of the regional crisis and more recently to

monetary policy. The ECB’s quantitative easing and negative interest rate policy opened a

 11 Gross short-term external debt reflects external debt with remaining maturity of one year or less, as

reported by the Joint External Debt Hub.

70

80

90

100

110

120

130

70

80

90

100

110

120

130

Jan-07Jan-08Jan-09Jan-10

Jan-11Jan-12Jan-13Jan-14Jan-15

Jan-16Jan-17Jan-18

Indexed to 20Y Avg = 100

India: Exchange Rates

INR/USD REER NEER

Sources: Reserve Bank of India, Bank for International Settlements
23

sizable gap in bond market yields between the United States and the euro area, which

contributed to the euro’s weakness versus its historical level through 2016. More recently,

however, the euro area’s improved economic performance and shifts in expectations for

the ECB policy outlook contributed to euro appreciation in 2017. 

The combination of lower oil prices and German economic policies supporting high

domestic saving and low consumption and investment has led to a rapid increase in

Germany’s current account surplus, which is now the largest nominal surplus in the world

at $299 billion over the four quarters through December 2017. Over the long run, there

has been a meaningful divergence between German domestic inflation and wage growth

and (faster) average euro area inflation and wage growth. This has contributed to a

general rise in Germany’s competitiveness vis-à-vis its euro area neighbors. However,

given the wide dispersion of economic performance across the euro area, the euro’s

nominal exchange rate has not tracked this rise in German competitiveness. Consistent

with this, the IMF estimates that Germany’s external position remains substantially

stronger than implied by economic fundamentals (whereas the euro area as a whole is

assessed by the IMF to have an external position broadly in line with economic

fundamentals).

A number of German economic policies have restrained domestic consumption and

investment, including elevated labor and value-added taxes and strict fiscal rules. Growth

was strongly supported by net exports for several years following the crisis, which led to a

substantial widening of the current account surplus. Since 2015, growth has been more

balanced, with German domestic demand largely accounting for growth over the last three

years. This has helped stall the growth in the current account surplus, but it has not been

sufficient to appreciably reduce external imbalances. The most recent data point to a sharp

weakening of domestic demand in recent quarters and declining personal consumption as a

share of GDP. Demand growth needs to accelerate substantially for a sustained period for

external rebalancing to proceed at a reasonable pace, which would be supported by

growth-friendly tax and other policy reforms. 

Germany’s bilateral trade surplus with the United States is excessive and a matter of

significant concern. Treasury recognizes that Germany does not exercise its own monetary

policy and that the German economy is near full employment. Nevertheless, Germany has a

responsibility as the fourth-largest economy globally and as an economy with a very large

external surplus to contribute to more balanced demand growth and to more balanced

trade flows. Allowing an increase in domestic demand against relatively inelastic supply

should help push up wages, domestic consumption, relative prices against many other euro

area members, and demand for imports; and higher relative prices would help appreciate

Germany’s undervalued real effective exchange rate. This would contribute to both global

and euro area rebalancing.

Switzerland

Switzerland has for several years faced persistent pressures from safe haven capital

inflows. These pressures subsided in the second half of 2017 as euro area economic
24

-10

-5

0

5

10

15

20072008200920102011201220132014201520162017

Percent of GDP

Switzerland: Current Account Balance

Income Services Goods Current Account Balance

Sources: Swiss National Bank, Haver

activity accelerated and

prospects for ECB policy

normalization appeared to

advance. At the same time, Swiss

domestic economic activity has

been relatively subdued and the

current account surplus remains

elevated. The current account

surplus in 2017 was 9.8 percent

of GDP, up marginally from 9.4

percent of GDP in 2016. 

Switzerland’s role as an

international trading and financial services hub contributes to its large current account

surplus: For example, the Swiss brokerage industry (which facilitates trade in goods)

constitutes 3-4 percent of GDP, but accounted for half of Switzerland’s trade surplus in

2017 even though the actual merchandise may not physically pass through Switzerland. 

The United States’ goods trade deficit with Switzerland was $7.7 billion in the second half

of 2017, up from $6.9 billion compared to a year earlier.

Reflecting the fall in safe haven inflow pressures, the Swiss franc depreciated 7.4 percent

against the euro and 1.6 percent against the dollar in nominal terms during the second half

of 2017. Further, both the nominal and real effective exchange rate (REER) depreciated

over the second half of the year, by 5.2 percent and 6.3 percent, respectively. This decline

brought the REER a bit below where it had stood in January 2015 prior to the surprise

removal of the floor on the franc that the Swiss National Bank (SNB) had maintained (vis-àvis the euro) for several years. The floor’s removal led to a sharp appreciation of the REER

in early 2015. Following that appreciation, the SNB for a couple years consistently

characterized the franc as “significantly overvalued.” The depreciation of the franc over the

second half of 2017 led the SNB to shift its assessment of the franc and state that it

remained “highly valued.” Nonetheless, by the end of 2017, franc depreciation had brought

the REER to within 3 percent of its 20-year average.

 

Switzerland has used both negative policy rates and intervention in foreign exchange

markets, as needed, over the last few years to contain appreciation pressures on the franc

and combat deflation. After remaining in negative territory for more than two years, yearover-year inflation turned positive in 2017, with both headline and core inflation moving

higher. 

While Swiss authorities do not publish monthly intervention data, Treasury estimates that

SNB purchases of foreign currency in 2017 totaled $44.9 billion (6.6 percent of GDP).12 

Treasury estimates that most net purchases of foreign exchange occurred over the first half

of 2017, in response to European political uncertainty leading up to the French Presidential

 12 The SNB publishes a single annual figure for net intervention in its Annual Report. The SNB reported that it

purchased 48 billion francs (about $48 billion) in foreign currency in 2017 to influence the exchange rate. 

Swiss National Bank, 110th Annual Report, 2017, p.57
25

0

10

20

30

40

50

60

70

Q1-2015Q2-2015Q3-2015Q4-2015Q1-2016Q2-2016Q3-2016Q4-2016Q1-2017Q2-2017Q3-2017

Q4-2017

Billion U.S. Dollars

Sources: SNB, Haver, U.S. Treasury estimates based on sight deposits 

Switzerland: Estimated FX Intervention election. Interventions tapered

off after the French election and

appeared to be minimal, or

possibly non-existent, during the

second half of 2017.13 

As a result of interventions and

valuation changes, the SNB’s

stock of foreign reserves has

grown to 113 percent of GDP by

end-2017. With inflation now

positive and safe haven

pressures having abated (at least

temporarily), the current window offers an opportunity to consider how to unwind this

large stock of foreign assets on the central bank’s balance sheet. Further, given that

economic activity remains subdued and both trade and current account surpluses are very

large, Switzerland should adjust macroeconomic policies to more forcefully support

domestic economic activity. For example, Switzerland appears to have ample fiscal space –

with the budget broadly balanced and public debt around 40 percent of GDP – and could

pursue tax or other structural reforms aimed at durably raising investment and

productivity. Treasury also encourages the Swiss authorities to publish all intervention

data on a higher frequency basis.

 13 Given uncertainties in estimating monthly or quarterly intervention from published sight deposit data, the

range of possible net intervention for the second half of 2017 encompasses zero.
26

Section 2: Intensified Evaluation of Major Trading Partners

Together, the Omnibus Trade and Competitiveness Act of 1988 (the “1988 Act”) and the

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

Secretary of the Treasury to provide semiannual reports on the foreign exchange policies of

the major trading partners of the United States. Under Section 3004 of the 1988 Act, the

Report must consider “whether countries manipulate the rate of exchange between their

currency and the United States dollar for purposes of preventing effective balance of

payments adjustment or gaining unfair competitive advantage in international trade.” 

Section 701 of the 2015 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.” Additionally, the 2015 Act establishes a process to engage economies

that may be pursuing unfair practices and impose penalties on economies that fail to adopt

appropriate policies.14

Key Criteria

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 (January to December 2017, unless

otherwise noted) are provided in Table 1 (on p. 14) and Table 2 (below). 

As noted earlier, Treasury’s focus is on the 12 largest trading partners of the United States;

these economies account for more than 70 percent of U.S. trade in goods. Additionally, this

Report covers Switzerland, which is currently the United States’ 15th largest trading

partner, but has previously been among the 12 largest trading partners and has appeared

on Treasury’s Monitoring List. Treasury’s goal is to focus attention on those economies

whose bilateral trade is most significant to the U.S. economy and whose policies are the

most material for the global economy. 

The results of Treasury’s latest assessment pursuant to Section 701 of the 2015 Act are

discussed below.

 14 Because the standards and criteria in the 1988 Act and 2015 Act are distinct, it is possible that an economy

could be found to meet the standards identified in one of the Acts without being found to have met the

standards identified in the other. In particular, a finding that an economy met the standards in the 1988 Act

of manipulating its currency would require Treasury to examine a wider array of additional facts such as

foreign exchange reserve coverage, capital controls monetary policy, or inflation developments.
27

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

Column 1 in Table 2 provides the bilateral goods trade balances for the United States’ 12

largest trading partners and Switzerland for the four quarters ending December 2017.15 

China has the largest trade surplus with the United States by far, after which the sizes of the

bilateral trade surpluses decline

notably. 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 in

column 1 are the seven major

trading partners that have a

bilateral surplus that meets this

threshold over the most recent

four quarters. Table 3 provides

additional contextual

information where available on

bilateral services trade with

these trading partners. 

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

2015 Act – this Report assesses euro area countries individually – data for the euro area are presented in

Table 2 and elsewhere in this Report both for comparative and contextual purposes, and because 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.

Goods Surplus with 

United States (USD 

Bil., Trailing 4Q) 

(1)

Balance

(% of GDP, 

Trailing 4Q)

(2a)

3 Year Change 

in Balance

(% of GDP) 

(2b)

Balance

(USD Bil., 

Trailing 4Q)

(2c)

Net Purchases

(% of GDP, 

Trailing 4Q)

(3a)

Net Purchases

(USD Bil., 

Trailing 4Q)

(3b)

Net Purchases

(USD Bil., 

Trailing 2Q)

(3c)

Net Purchases

8 of 12 

Months†

(3d)

China 375 1.4 -0.9 168 -0.6 -68 -6 No

Mexico 71 -1.6 0.2 -18 -0.2 -2 0 No

Japan 69 4.0 3.3 197 0.0 0 0 No

Germany 64 8.1 0.6 299 .. .. .. ..

Italy 32 2.8 0.9 54 .. .. .. ..

India 23 -1.5 -0.2 -39 2.2 56 27 Yes

Korea 23 5.1 -0.9 78 0.6 9 6 Yes

Canada 18 -3.0 -0.6 -49 0.0 0 0 No

Taiwan 17 14.6 3.1 84 1.3 7 5 Yes

France 15 -0.6 0.4 -15 .. .. .. ..

Switzerland 14 9.8 1.4 67 6.6 45 9 Yes

United Kingdom -3 -4.1 1.3 -107 0.0 0 0 No

Brazil -8 -0.5 3.8 -9 0.1 2 -3 No

Memo : Euro Area 133 3.5 1.0 440 0.0 0 0 No

Table 2. Major Foreign Trading Partners Evaluation Criteria

Sources: U.S. Census Bureau; Haver Analytics; National Authorities; U.S. Department of the Treasury Staff Estimates

Bilateral Trade Current Account Foreign Exchange Intervention

†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.

Goods Surplus with 

United States (USD 

Bil., Trailing 4Q) 

(1a)

Goods Trade 

(USD Bil., 

Trailing 4Q) 

(1b)

Services Surplus with 

United States (USD 

Bil., Trailing 4Q)* 

(1c)

Services Trade 

(USD Bil., 

Trailing 4Q)* 

(1d)

China 375 636 -38 74

Mexico 71 557 -7 60

Japan 69 204 -14 79

Germany 64 171 3 66

Italy 32 68 3 22

India 23 74 6 52

Korea 23 119 -12 34

Canada 18 582 -26 92

Taiwan 17 68 -2 18

France 15 82 -2 37

Switzerland 14 58 n.a. n.a.

United Kingdom -3 109 -11 122

Brazil -8 67 -19 32

Memo : Euro Area 133 554 n.a. n.a.

Source: U.S. Census Bureau

Bilateral Trade

Table 3. Major Foreign Trading Partners - Expanded Trade Data

*Services data is reported on a balance of payments basis (not seasonally adjusted), while goods data is 

reported on a census basis (not seasonablly adjusted). Bilateral services trade data through Q4 2017 is 

not yet available from the Census Bureau for some trading partners.
28

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 2a of Table 2 are the

five economies that had a current account surplus in excess of 3 percent of GDP for the four

quarters ending December 2017. In the aggregate, these five economies accounted for

more than half of the value of global current account surpluses as of the end of 2017. 

Column 2b shows the change in the current account surplus as a share of GDP over the last

three years, although this is not a criterion for enhanced analysis. 

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

Treasury assesses net purchases of foreign currency, conducted repeatedly, totaling in

excess of 2 percent of an economy’s GDP over a period of 12 months to be persistent, onesided intervention.16 Columns 3a and 3d in Table 2 provide Treasury’s assessment of this

criterion.17 In economies where foreign exchange interventions are not published,

Treasury uses estimates of net purchases of foreign currency to proxy for intervention. 

Switzerland and India meet this criterion for the four quarters ending December 2017, per

Treasury estimates.

Summary of Findings

Pursuant to the 2015 Act,18 Treasury finds that no major trading partner of the United

States met all three criteria in the current reporting period. Five major trading partners of

the United States, however, met two of the three criteria for enhanced analysis in this

Report. Additionally, one major trading partner, China, constitutes a disproportionate

share of the overall U.S. trade deficit. These six economies – China, Japan, Korea, India,

Germany, and Switzerland – constitute Treasury’s Monitoring List. Japan, Germany,

and Korea have met two of the three criteria in every Report since the April 2016 Report

(the initial Report based on the 2015 Act), having material current account surpluses

combined with significant bilateral trade surpluses with the United States. Switzerland has

met two of the three criteria in every Report since the October 2016 Report, having a

 16 Notably, this quantitative threshold is sufficient to meet the criterion. Other patterns of intervention, with

lesser amounts or less frequent interventions, might also meet the criterion depending on the circumstances

of the intervention.

17 Treasury used publicly available data for intervention on foreign asset purchases by authorities, or

estimated intervention based on valuation-adjusted foreign exchange reserves. This methodology requires

assumptions about both the currency and asset composition of reserves in order to isolate returns on assets

held in reserves and currency valuation moves from actual purchases and sales, including estimations of

transactions in foreign exchange derivatives markets. Treasury also used 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 PBOC’s balance sheet and Taiwan’s reporting of net foreign assets at its central bank. To

the extent the assumptions made do not reflect the true composition of reserves, estimates may overstate or

understate intervention. Treasury strongly encourages those economies in this Report that do not currently

release data on foreign exchange intervention to do so.

18 Section 701 of the Trade Facilitation and Trade Enforcement Act of 2015, 19 U.S.C. § 4421.
29

material current account surplus and having engaged in persistent, one-sided intervention

in foreign exchange markets. China has met one of the three criteria in every Report since

the October 2016 Report, having a significant bilateral trade surplus with the United States,

with this surplus accounting for a disproportionate share of the overall U.S. trade deficit. 

India met two of the three criteria for the first time in this Report, having a significant

bilateral surplus with the United States and having engaged in persistent, one-sided

intervention in foreign exchange markets. Treasury will closely monitor and assess the

economic trends and foreign exchange policies of each of these economies.

Regarding the 2015 Act, while no economy met all three of the criteria for the current

reporting period, Treasury remains deeply concerned by the significant and persistent

trade imbalances in the global economy. The global adjustment process has not worked

effectively to promote a symmetric adjustment toward smaller imbalances in a manner that

sustains – rather than inhibits – global growth. 

Achieving stronger and more balanced global growth will require that domestic demand

become the sustained engine for economic expansion in key economies that have

maintained large and persistent external surpluses. This could be supported by them

putting in place more efficient tax systems with low rates and broad bases, regulatory

frameworks that support domestic investment, and sound monetary policies. Strong

economic fundamentals will help support greater stability in exchange rates, contributing

to stronger growth and investment. Securing faster global growth also requires that all

economies durably avoid macroeconomic, foreign exchange, and trade policies that

facilitate unfair competitive advantage. 

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

partner of the United States met the standard in the 1988 Act 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 competitive advantage in

international trade during the period covered in the Report. 

 
30

Annex I: Rebalancing the Global Economy – Progress Report19

The persistence and concentration of large trade and current account imbalances is a key

motivation behind policy efforts to combat unfair currency practices and address

distortionary macroeconomic and trade policies. The United States has long been a trade

and current account deficit economy, mirrored by long-running trade and current account

surpluses in other key economies. This historical imbalance – where one economy, or

group of economies, does much of the net buying while others do much of the net selling –

inevitably raises concerns about the sustainability of global economic momentum. 

Following the global crisis in 2008-09, G-20 Leaders set out to create a process of economic

cooperation based on the goals of achieving strong, sustainable, and balanced growth,

premised on the notion that deficit economies would do more to boost their saving and

surplus economies would do more to boost demand. Relative shifts in demand would

support global trade adjustments in a way that would be least disruptive to aggregate

demand and the global economy. Given the endogeneity of exchange rates, relative prices

also would adjust and reinforce the new patterns of trade and demand.

This annex reviews the evolution of global account imbalances, and looks at how demand,

national saving, and exchange rate patterns have behaved across the largest trade deficit

and surplus economies in the post-crisis period. With this context, it assesses how well the

global adjustment process has worked, and considers some of the implications of

imbalances were they to persist. 

In general, current account surpluses among several major trading partners over the last

two decades have proven both large and persistent. The global adjustment process has not

worked effectively in the post-crisis era to promote a symmetric adjustment toward

smaller imbalances in a manner that sustains – rather than inhibits – global growth. Nor

are there signs that typical adjustment mechanisms – most notably real exchange rates and

relative rates of demand growth – are currently pointing toward a narrowing of external

imbalances.

Global Imbalances in Perspective

Global imbalances stayed around 1.5 percent of global GDP for much of the 1980s and

1990s. Oil exporting and East Asian economies (mostly Japan) accounted for much of the

total surplus during that period. The United States was a major deficit economy through

most of the period, with an average current account deficit of 1.6 percent of U.S. GDP (and

0.5 percent of global GDP). 

 

19 This annex was prepared by Alexandra Altman and Daniel Hall.
31

The late 1990s marked a turning point in the evolution of global imbalances, as imbalances

doubled in size in less than a decade, reaching 3 percent of global GDP by 2006. Much of

the growth on the surplus side was concentrated among East Asian economies, particularly

those leveraging growth models heavily reliant on net exports. China was the leading

exemplar, as rapidly escalating trade surpluses pushed China’s share of global surpluses

from a negligible level in the late 1990s to nearly one-quarter of the global total by 2008. 

Outside of Asia, surpluses began accumulating over the 2000s in northern Europe, as the

initial decade after the creation of the euro saw a rapid build-up of external imbalances

within the currency union between deficit economies in peripheral Europe and surplus

economies in the northern core (most significantly, Germany). Surpluses also grew in the

oil exporting economies, as rising energy prices pushed their collective current account

surpluses to more than 30 percent of the global total. 

The 2008-09 financial crisis triggered a collapse in global demand, which exerted a sizable

drag on global trade.20 Global imbalances decreased immediately to around 2 percent of

global GDP, where they have remained largely unchanged to the present day. Despite the

post-crisis improvement, the outstanding gap of roughly 1⁄2 percent of global GDP between

the average level of imbalances over the last few years and the 1980-2000 average is not

trivial, equivalent to nearly $400 billion. 

 20 Real global GDP declined in 2009 for the first time since 1991 in per capita terms, and in overall terms for

the first time since World War II.

-4

-3

-2

-1

0

1

2

3

4

1980198219841986198819901992199419961998200020022004200620082010201220142016

Percent of Global GDP

Global Current Account Imbalances

China Germany Japan

Other Surplus United States Other Deficit

Statistical Discrepancy

Sources: IMF WEO, Haver
32

-5

0

5

10

15

China

Korea

Japan

Germany

Switzerland

Oil Exporters

U.S.

Current Account Balance (% of GDP)

2000 2008 2017

Source: IMF October 2017 WEO

Further, imbalances in the postcrisis period have become, from

a historical perspective,

unusually concentrated in a

relatively small number of

countries, mostly in East Asia

and northern Europe. Two facts

largely account for this. First, the

rebalancing process within the

euro area was asymmetric, with

peripheral European economies

closing their external deficits but

Germany and other northern

European economies continuing to run large trade surpluses with the rest of the world. 

Second, the sharp fall in commodity prices led to a rotation of surpluses out of oil exporters

and into oil importing economies in Asia and Europe, pushing existing surpluses higher. 

The major deficit economies have remained largely the same over the past several decades,

with the United States accounting for roughly half the global deficit, and the remainder

spread across a number of economies (notably the United Kingdom and the larger

economies in the Western Hemisphere).

Trends in Global Demand Growth

The post-crisis G-20 compact to support strong, sustainable, and balanced growth by

raising demand in surplus economies and raising saving in deficit economies generally fell

short of its aims. Saving rates underwent limited adjustment across both deficit and

surplus economies. Further, there was a broad-based fall in demand across most

economies – and with it, a fall-off in global growth – rather than a boost to domestic

demand in most surplus economies, which would have led to a stronger and more balanced

global recovery:

• In the smaller industrialized economies of Asia (e.g., Korea, Taiwan), domestic

demand growth actually decelerated, while saving rates and current account

surpluses were generally stable or rising.

• Germany did see a modest increase in domestic demand relative to its very weak

pre-crisis trend. However, domestic demand growth in Germany fell short of real

GDP growth in six of the last eight years, meaning that net exports have made a

substantial cumulative contribution to Germany’s growth since the crisis. Further,

Germany’s saving rate rose significantly compared to the pre-crisis average, as did

its trade and current account surpluses. Thus, while German demand strengthened

relative to its pre-crisis trend, the gains were largely captured domestically rather

than spilling over to the rest of the world.
33

• In Japan, domestic demand ticked up from its modest pre-crisis average, exceeding

GDP growth for the first few years after the crisis and facilitating some external

adjustment. The trade balance was also impacted by exogenous events, as it

declined notably – falling into deficit – after the 2011 earthquake and tsunami,

which sharply pushed up energy imports. These factors played into the decline in

the saving rate in the first few years after the crisis. In the last couple of years, this

adjustment has partially reversed, with domestic demand weakening, the trade

balance returning to surplus (aided by the fall in energy prices in 2014), and the

saving rate ticking up.

• China is the most successful example of external rebalancing in the post-crisis

period among the major surplus economies. Domestic demand pulled back slightly

from the very strong pre-crisis level, but headline trend growth was also slowly

coming down over this period. As a result, domestic demand growth exceeded GDP

growth in 5 of the last 8 years, and the cumulative contribution to growth from

domestic demand exceeded GDP growth over this period, meaning that at least a

portion of Chinese demand was spilling over to the rest of the global economy. 

China’s immense pre-crisis current account trended down. Where China has been

much less successful is in achieving internal domestic adjustments that would make

external rebalancing more sustainable, particularly with regard to the very high

saving rate. External rebalancing after the crisis was not a function of a fall in the

saving rate; instead, it was facilitated by a massive rise in credit-fueled investment,

which more-than-offset a sharp rise in the saving rate. China needs to lower

domestic saving – allowing household consumption to take the place of investment –

to sustain growth momentum and ensure current (necessary) deleveraging efforts

do not ultimately lead to a reemergence of large external surpluses.

The upshot is that domestic demand growth has been persistently weak, and weaker than

GDP growth, across surplus economies (excluding China). Moreover, demand growth

across surplus economies (excluding China) has been even slower on average than that of

deficit economies, as seen in the chart on the following page, and the gap has been

widening due to a further slowdown among surplus economies over the last two years.

Among the deficit economies post crisis, the United States experienced the most dramatic

decline in demand growth, as national saving recovered to around its average level from

1995-2005 (which was well above its crisis low around 14 percent). Outside of India, no

other deficit economy managed to substantially raise national saving in the aftermath of

the crisis. 

Rebalancing in a manner that is supportive of global growth will require further policy

action by surplus economies to durably strengthen domestic investment and consumption. 

In economies where investment has been weak (e.g., Germany), this could mean tax and

other fiscal reforms alongside structural changes that aim to raise both public and private

investment. In economies with still-low rates of household consumption (e.g., China,

Korea), this could mean expansions of the social safety net and other tax or fiscal reforms
34

that boost the spending power of households, along with structural reforms that support

greater entrepreneurship.

Real Effective Exchange Rate Adjustments

Ideally, real exchange rates over the medium term should move in directions that reinforce

rebalancing of global trade and demand. This means that exchange rates should generally

appreciate in surplus economies so that higher consumption of foreign goods is

1995-2005 2010-2015 2016-2017 1995-2005 2010-2015 2016-2017

Surplus Economies 2.3% 4.4% 4.4% 28% 36% 36%

Surplus ex-China 1.8% 1.2% 0.8% 27% 27% 28%

China 9.0% 8.5% 8.1% 41% 49% 46%

Japan 1.1% 1.5% 0.8% 30% 25% 27%

Germany 0.8% 1.5% 2.4% 22% 27% 28%

Korea 4.3% 3.4% 4.6% 35% 35% 37%

Italy 1.8% -0.9% 1.2% 21% 18% 20%

Switzerland 1.5% 1.1% 0.3% 34% 35% 34%

Taiwan 4.1% 3.0% 1.4% 29% 34% 35%

Deficit Economies 3.2% 2.3% 2.1% 20% 19% 19%

Canada 3.4% 2.4% 2.3% 21% 21% 20%

Mexico 2.7% 2.9% 2.3% 21% 21% 21%

UK 3.4% 2.3% 1.9% 17% 13% 13%

France 2.4% 1.2% 1.9% 23% 22% 22%

India 6.5% 6.8% 7.0% 26% 33% 29%

Brazil 2.5% 2.5% -2.2% 16% 18% 16%

United States 3.8% 2.3% 2.0% 19% 18% 18%

Source: National Authorities, IMF, U.S. Department of the Treasury Staff Calculations

Gross National Saving

(GDP-Weighted Average)

Domestic Demand Growth 

(GDP-Weighted Average, YoY)

Note: Total domestic demand for all economies, excluding Brazil (only final domestic demand is available). 

Aggregate groups are weighted by nominal U.S. dollar GDP at market exchange rates. 

-4%

0%

4%

8%

200020022004200620082010201220142016

Percent YoY, GDP Weighted

Domestic Demand Growth (YoY)

Surplus Economies

Surplus ex-China

Deficit Economies

Source: National Authorities, IMF, Treasury Calculations

100

120

140

160

180

200

1994199720002003200620092012

2015

Indexed to 1994 = 100

Index: Domestic Demand Growth 

Surplus Economies

Surplus ex-China

Deficit Economies

Source: National Authorities, IMF, Treasury Calculations
35

0

2

4

6

8

10

12

14

0

2

4

6

8

10

12

14

1990199119931995199719992001200220042006200820102012201320152017

Trillion U.S. Dollars

Global Foreign Exchange Reserves

World China Asia ex-China*

Note: Includes valuation effects; *Includes Hong Kong, India, Japan, Korea, 

Malaysia, Singapore, Taiwan, Thailand, and Vietnam.

Sources: IMF, Haver

encouraged in those economies; and the currencies of deficit economies should generally

depreciate to improve their export competitiveness. 

The record on exchange rates adjusting in ways to support rebalancing has been spotty

over the last couple of decades. Part of this is due to very substantial exchange rate

intervention over the last twenty years, which prevented exchange rates from adjusting as

fully or as rapidly as external imbalances might dictate. This intervention is reflected in the

massive increase in global foreign exchange reserves since the end of the 1990s, with

global reserves rising by $9.8 trillion over the last two decades (to $11.4 trillion as of

December 2017). Much of this increase in reserves has been concentrated in Asia: China’s

reserves grew by $3 trillion between 1997 and 2017 (as of end-2017, China’s reserves

accounted for almost 30 percent of global reserves), while reserves in Asia excluding China

also rose by nearly $2.9 trillion. 

Though the trend of large and

rapid reserve accumulation has

shifted in recent years – largely

associated with the decline in

Chinese reserves amid

significant capital outflows – it is

important that further currency

interventions and reserve

accumulation that hinder

market-driven exchange rate

adjustment be avoided.

Past intervention notwithstanding, real effective exchange rates (REER) in several key

regions have adjusted in the direction that would narrow imbalances over a longer horizon. 

China’s REER appreciated nearly 30 percent from 2000 to 2017. Switzerland’s REER has

increased as well, 15 percent on net between 2000 and 2017. Given that both economies

maintain current account surpluses – Switzerland’s surplus in particular is very large as a

share of GDP – some continued real effective appreciation would be consistent with a

narrowing of external imbalances.

Japan and Taiwan, on the other hand, now have REERs that are far below their level in

2000, by 40 percent and 20 percent, respectively. In addition, Germany – as a member of

the euro area – has benefitted from an undervalued real effective exchange rate relative to

the strength of the German economy, particularly in the post-crisis era. The value of the

euro has not kept pace with the increase in Germany’s competitiveness vis-à-vis its

neighbors, as discussed in this Report, due to the wide dispersion of economic performance

across the euro area.
36

Exchange rates have moved in a direction consistent with rebalancing across most of the

deficit economies, particularly in recent years. Between 2014 and 2017, annual average

REERs in Canada, Mexico, the United Kingdom, France, and Brazil depreciated between 4

and 20 percent, in many cases reflecting domestic political developments (Brexit; U.S.-

Mexico trade policy risks; Petrobras scandal and recession in Brazil). The recent

depreciations in Mexico and the United Kingdom are part of a substantial longer-run fall in

exchange rates which would be expected to contribute to external adjustment in both

economies, as real effective rates are now nearly 30 percent below their level in 2000. 

Conversely, the U.S. dollar has appreciated sharply since 2014 on a real effective basis,

erasing the move down in the dollar witnessed in the immediate post-crisis period and

bringing the U.S. REER back broadly in line with its pre-crisis average. 

In sum, adjustments in exchange rates in recent years among then United States’ major

trading partners offer mixed support for rebalancing U.S. external accounts. While

exchange rates have shifted in recent years to facilitate rebalancing among deficit

economies, there has been generally limited adjustment among major surplus economies. 

Implications of Persistent Imbalances

The key global adjustment mechanisms have not worked over the post-crisis to effectively

rebalance and sustain growth: domestic demand and national saving rates have not for the

most part facilitated transition toward a more balanced pattern of global demand that

would support stronger global growth, nor have there been supportive exchange rate

adjustments. This has meant that imbalances have remained not only large but also

unusually persistent. This in turn has widened stock imbalances, reflecting large net

foreign asset accumulations among northern European and Asian surplus economies and

growing liabilities among deficit economies, primarily the United States. In nominal terms,

net international assets increased between $1.5 and $1.9 trillion in Germany, Japan, and

China from 2000 to 2016. Net foreign liabilities of the United States, the world’s largest
37

debtor, have more than

quadrupled over the last two

decades, rising from $1.5 trillion

in 2000 (15 percent of U.S. GDP)

to $7.8 trillion in 2017 (40

percent of U.S. GDP).21 

As highlighted by the IMF in the

2017 External Sector Report,

excess imbalances are likely to

widen further over the medium

term absent policy actions and

reforms to make external

adjustment more effective. Further, large (and growing) stock positions can perpetuate

global imbalances and pose risks to global growth over the longer run. Recent BIS work

finds that stock imbalances may have a destabilizing impact on creditor economies’

accumulation of external wealth – that is, positive stocks of net foreign assets have not

historically led to adjustments in the trade balance, and ultimately contribute to larger

future current account surpluses.22 History suggests that large external stocks will, at

some point, be unwound (at least partially). Whether the adjustment process that is

involved in the decline of those stocks is a drag on the global economy – as it proved to be

in the global financial crisis – or can be done in a way that maintains global economic

momentum will depend on whether major economies can put in place a more symmetric

rebalancing process that entails all economies carrying a share of the adjustment. 

 21 Note that changes in the net international investment position reflect both flow effects (current account

imbalances) as well as valuation effects; valuation changes in the post-crisis period have had significant

effects in the United States, Germany, Japan, China (reducing the value of net international assets), and in

Canada and the United Kingdom (increasing the value of the net international assets). 22 Alberola, Estrada, and Viani. (March 2018). BIS Working Papers No 707: Global Imbalances From a Stock

Perspective. The Asymmetry Between Creditors and Debtors. Monetary and Economic Department. Stock

imbalances of debtor economies, by contrast, generally have a stabilizing impact on external imbalances, as

they tend to reduce trade imbalances, limit current account deficits, and curb future debt accumulation.

-20%

-10%

0%

10%

20%

2004200520062007200820092010201120122013201420152016

Percent of Global GDP

International Investment Positions

China Germany Japan

Other Surplus United States Other Deficit

Sources: IMF, Central Bank of China (Taiwan)
38

Annex II: Global Capital Flows – Recent Trends and Volatility23

Two predominant trends have shaped global (non-reserve) capital flows in recent years: 

most notably, capital fled out of China rapidly from mid- 2014 to early 2017, an abrupt shift

following a decade of rising inflows. In addition, capital outflows from the euro area and, to

a lesser degree, Japan accelerated as central banks in these economies employed

unconventional monetary policy. In the background, the United States continued to attract

the largest capital inflows globally, a trend which persisted through both the global

financial crisis and recent regional swings. Despite these developments, most emerging

markets aside from China have not experienced greater volatility of capital flows (when

measured as a share of GDP) compared to the previous decade. 

Recent Trends in Capital Flows

China

China attracted steady and rising foreign inflows over the decade prior to the global

financial crisis, and foreign inflows accelerated further in the years immediately after the

crisis. Though smaller in scale, investment by Chinese residents abroad also grew over this

period, particularly from 2010 onwards, as the capital account was gradually liberalized. 

 

23 This annex was prepared by Alexandra Altman and Daniel Hall.

Average Annual Net Capital Flows (2014-2016)

($US Billion)

-500 500

Japan

-110

China

-470

Asia ex-China

-140

United 

Kingdom

+175

AE Europe

-500

Latin 

America

+110

United 

States

+420

Note: Net capital flows exclude reserves
39

In mid-2014, however, this picture changed markedly. Growing concerns over the growth

outlook, financial stability, and the trajectory of the renminbi in 2014 caused foreign

investors to pull back: annual FDI inflows shrank each year through 2016, and non-FDI

inflows reversed outright in 2015, as foreign investors withdrew $350 billion of ‘other

investments’. 24 At the same time, Chinese investment abroad accelerated sharply, growing

to exceed $650 billion by 2016. Further, analysts have suggested that there could be large

additional Chinese outflows that are not captured within the conventional components of

the capital account: the ‘net errors and omissions’ category grew precipitously over this

period – reaching over $200 billion in both 2015 and 2016 – possibly reflecting additional

outflows, while research suggests that some resident outflows – possibly amounting up to

1 percent of GDP – have been disguised as tourism exports within the current account.25 

In response to persistent outflow pressures – with $1.4 trillion having left China on net

from 2014 to 2016 – Chinese regulators gradually tightened existing capital controls,

effectively pausing (or reversing) the trend towards capital account liberalization. Data

through the third quarter of 2017 suggest that capital restrictions, along with efforts to

more clearly communicate the authorities’ intentions for the exchange rate and stronger

than expected growth, have helped reduce outflows: resident outflows (through Q3) show

a marked deceleration from prior years (less than half of the magnitude of outflows in the

first three quarters of 2016). Foreign investor sentiment toward China also improved in

the midst of strong economic performance, with non-FDI inflows in the first three quarters

of 2017 reaching their highest level since 2013 (though FDI inflows continued their secular

decline).

 24 In the Balance of Payments data, ‘other investments’ refers to a broad set of non-portfolio or direct

investment activities that include bank flows, trade credits, and insurance and pension guarantee schemes.

25 "China's Current Account: External Rebalancing or Capital Flight?" Wong, Anna (2017). International

Finance Discussion Papers 1208. Board of Governors of the Federal Reserve System.

-800

-600

-400

-200

0

200

400

600

800

2000 2002 2004 2006 2008 2010 2012 2014 2016

Billion U.S. Dollars

Direct Investment (Foreign) Direct Investment (Domestic)

Portfolio Investment (Foreign) Portfolio Investment (Domestic)

Other Investment (Foreign) Other Investment (Domestic)

Net Capital Flows (excl reserves)

Source: National Authorities

Capital Outflows

Capital Inflows

China: Capital Flows by Composition and Source
40

Euro Area and Japan

Net capital outflows from the euro area accelerated as the region was wracked by crisis,

averaging over $400 billion per year from 2011 to 2013. Net outflows picked up further in

response to the ECB’s adoption of negative policy rates in 2014 and large scale asset

purchases in 2015 – with $1.9 trillion leaving the region on net from 2014 to 2017 – while

the composition of flows also shifted in response to unconventional policy. Germany is the

key exemplar and primary driver behind the regional trend.26 Portfolio investment

inflows, which had accounted for the largest share of gross inflows pre-crisis, diminished

substantially post-crisis and turned negative (foreign investors withdrawing) in almost

every year since 2013, reflecting the acute effects of the ECB’s asset purchase program on

German government bond yields.27 

Japan, historically a net capital exporter, also saw an acceleration of net outflows following

the introduction of their asset purchase program in 2013. Net portfolio outflows, in

particular, grew substantially over 2015 and 2016, driven by a sharp increase in resident

outflows and a collapse in foreign portfolio inflows. In 2016, following the Bank of Japan’s

adoption of its negative interest rate policy, net outflows peaked at $185 billion, the highest

level in over two decades. 

 26 Net capital outflows from Germany account for almost 60 percent of the euro area-wide net outflows from

2011 through Q3-2017.

27 During the ECB’s asset purchase scheme, the German 10-year Bund fell to an all-time low of -0.24 basis

points in July 2016. For further discussion of the composition of portfolio flows in Europe and elsewhere in

response to the ECB’s unconventional monetary policies, see “The International Dimension of the ECB’s Asset

Purchase Program”, Speech by Benoît Cœuré, Member of the Executive Board of the ECB at the Foreign

Exchange Contact Group meeting, July 11 2017.

-1000

-800

-600

-400

-200

0

200

400

600

800

2000 2002 2004 2006 2008 2010 2012 2014 2016

Billion U.S. Dollars

Direct Investment (Foreign) Direct Investment (Domestic)

Portfolio Investment (Foreign) Portfolio Investment (Domestic)

Other Investment (Foreign) Other Investment (Domestic)

Net Capital Flows (excl reserves)

Source: National Authorities

Capital Outflows

Capital Inflows

Germany: Capital Flows by Composition and Source
41

Elsewhere, oil exporters and Asia’s newly industrialized economies have been net capital

exporters. Across both groups of economies, outflows were driven by a strong post-crisis

resurgence in domestic investor outflows, particularly in portfolio investment.

The United States, United Kingdom, and Major Emerging Markets

The counterpart to rising outflows from Europe and Japan, and more recently China, over

this period has been sizeable inflows to other major economies, particularly the United

States, United Kingdom, and large (non-Asian) emerging market economies. By

comparison to their European and Japanese peers, accommodative monetary policies in the

United States and United Kingdom ended sooner, and never pushed domestic interest rates

to negative levels. 

The United States continues to be by far the largest recipient of global capital, with net

inflows rising gradually over the last three years, though still remaining well below their

pre-crisis peak. In addition, there have been notable shifts in the composition of capital

coming into the United States. Whereas net portfolio flows constituted the large majority

of inward investment to the United States in the pre-crisis period, they have since declined

substantially, due primarily to a substantial reduction of foreign inflows. Foreign investors

actually withdrew money from U.S. equities in 2015 and 2016 (average $160 billion each

year), while inflows into U.S. debt securities also declined noticeably (though debt inflows

remained larger than equity outflows). The decline in portfolio debt inflows stemmed from

large official sales of U.S. debt securities (corresponding to the use of reserves by China and

other emerging markets to cushion external pressures), offset in part by large private

purchases of debt securities, particularly corporate debt. Data through the third quarter of

2017 point to a resurgence of both U.S portfolio investment abroad and foreign inflows

back to pre-crisis levels. Meanwhile, an increased share of net inflows since the crisis has

been accounted for by net “other investment” flows (bank deposits), predominantly

reflecting shifts in interbank funding patterns as U.S. branches of foreign banking

institutions increased their reserve holdings at the Federal Reserve.

-2000

-1500

-1000

-500

0

500

1000

1500

2000

2500

2000 2002 2004 2006 2008 2010 2012 2014 2016

Billion U.S. Dollars

Direct Investment (Foreign) Direct Investment (Domestic)

Portfolio Investment (Foreign) Portfolio Investment (Domestic)

Other Investment (Foreign) Other Investment (Domestic)

Net Capital Flows (excl reserves)

Source: National Authorities

Capital Outflows

Capital Inflows

United States: Capital Flows by Composition and Source
42

The United Kingdom has also attracted a growing share of global capital, driven by an

increase in portfolio inflows since 2013 as well as modest inflows from domestic investors

repatriating portfolio and direct investments from abroad. 

For the emerging market economies receiving capital inflows, the magnitude of flows

(excluding China) generally pales in comparison to flows into major advanced economies. 

Immediately following the crisis, emerging markets initially benefitted from a shift in

capital flows away from the advanced economies, though in recent years concerns related

to China’s economic outlook have dampened emerging market inflows. Nevertheless,

several major emerging market economies (including Brazil, India, Indonesia, Mexico,

South Africa, and Turkey in the G-20) have each received small but steady net inflows over

recent years, via both direct and portfolio investment. Flows into these economies have

generally accounted for the large majority of capital going into their respective regions, as

smaller economies have received much smaller inflows in nominal terms.

Capital Flow Volatility

Given these changes in regional flows, both policymakers and academics have confronted

the question of how the volatility of capital flows has changed.28 Looking at the experience

of more than 70 emerging market economies, we find that volatility – as measured by the

rolling 5-year standard deviation of an economy’s gross capital flows – has increased in

nominal terms (meaning the dollar amounts have swung more widely), but once the flows

are scaled relative to GDP, volatility post-crisis for the 70 emerging market economies in

our sample is broadly in line with volatility pre-crisis. The dispersion of volatility of both

nominal flows and flows as a share of GDP, however, has increased relative to pre-crisis,

highlighting that capital flow volatility has risen recently among the top quartile of

economies.

As shown in the accompanying chart, capital flow volatility as a share of GDP is currently

around pre-crisis levels for the median emerging market economy. Leading into the crisis,

capital flow volatility rose for the majority of economies (the 25th to 75th percentile

distribution shifted up), coincident with the pickup in global capital flows into emerging

markets described above. At the same time, the dispersion of volatility increased, reflecting

growing differences in economies’ experience with cross-border capital flows. In recent

years, the median level of volatility has declined to its lowest in over a decade, but

dispersion remains elevated and biased upward relative to pre-crisis. In general, the

increasing upward bias (as a share of GDP) reflects heightened volatility among smaller

emerging market economies (Hong Kong, Latvia, Mongolia, Qatar, Slovakia), whereas

capital flow volatility for many of the larger economies has remained around pre-crisis

levels and even below the median (China, Korea, India, Brazil). Taiwan is a notable

 28 For a discussion of several alternative measures of capital flow volatility, see Pagliari, Maria Sole and

Swarnali Ahmed Hannan, The Volatility of Capital Flows in Emerging Markets: Measures and Determinants. IMF

Working Paper WP/17/41 Feb 2017.
43

exception, where capital flow volatility (as share of GDP) has nearly doubled relative to

pre-crisis, reflecting increasing volatility of both inflows and outflows. 

In line with the increase in the nominal size of capital flows, nominal volatility has risen for

the vast majority of emerging markets economies. Unsurprisingly, the largest economies

have tended to experience the greatest nominal volatility, including the large G-20

emerging market economies (e.g., Brazil, China, Korea, and Russia). However, the pattern

of volatility has differed across economies: in China, Korea, and Brazil, volatility of capital

inflows increased substantially more than that of outflows in the post-crisis period, while

volatility across both inflows and outflows picked up in Mexico, Russia, and Taiwan postcrisis relative to pre-crisis. 
44

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 own currency for a foreign currency,

increasing its foreign currency reserves. Sales involve the exchange of an economy’s

foreign currency reserves for its own currency, reducing foreign currency reserves. 

Interventions may be sterilized or unsterilized.

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

economy’s currency 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 set rate of exchange between its currency and another currency or a basket of

currencies. Often the exchange rate is allowed to move 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. Unlike the nominal effective exchange rate, it is further

adjusted for the effects of inflation in the countries concerned. 

Trade Weighted Exchange Rate – see Nominal Effective Exchange Rate.