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 14, 2017
Contents

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

SECTION 1: GLOBAL ECONOMIC AND EXTERNAL DEVELOPMENTS..................................... 5

U.S. ECONOMIC TRENDS .......................................................................................................................................5

INTERNATIONAL ECONOMIC TRENDS..................................................................................................................7

ECONOMIC DEVELOPMENTS IN SELECTED MAJOR TRADING PARTNERS...................................................... 13

SECTION 2: INTENSIFIED EVALUATION OF MAJOR TRADING PARTNERS.......................23

KEY CRITERIA ..................................................................................................................................................... 23

SUMMARY OF FINDINGS ..................................................................................................................................... 25

GLOSSARY OF KEY TERMS IN THE REPORT ...............................................................................27

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

This Administration places a very high priority on ensuring that American workers and 

companies face a level playing field when competing internationally. When our trading 

partners engage in currency manipulation, they impose significant, and often long-lasting, 

hardship on American workers and companies. Expanding trade in a way that is freer and 

fairer for all Americans requires that other economies avoid unfair currency practices and 

persistent exchange rate misalignments; that they refrain from competitive exchange rate 

devaluations; and that they not target exchange rates for competitive purposes. A stronger 

and fairer international trading system must also be supported by more robust and better 

balanced growth globally, with demand-led growth becoming the engine for expansion in 

key economies that have large external surpluses. 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 this Administration’s strategy 

for securing a stronger America and a more robust and fair global economy.

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 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 2016, the $20 billion bilateral trade surplus threshold 

captures almost 80 percent of the value of all trade surpluses with the United States, while 

the 3 percent current account threshold captures more than three-fourths 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 for the current reporting period. 

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 2016. 

 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, and the UK. 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.
2

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

reporting period, Treasury is determined to watch very closely for any unfair currency 

practice that creates a burden for U.S. workers and U.S. companies. Though there has been 

a trend in the last two years towards reduced currency intervention by key trading 

partners, it is critical that this not represent merely an opportunistic response to shifting 

global macroeconomic conditions – in particular changes in capital flows which have 

created depreciation pressures on many emerging market currencies – but a durable policy 

shift away from foreign exchange policies that facilitate unfair competitive advantage. 

Further, the current global configuration of external positions, in which there are pockets 

of extremely large trade and current account surpluses, is untenable. The United States 

cannot and will not bear the burden of an international trading system that unfairly 

disadvantages our exports and unfairly advantages the exports of our trading partners 

through artificially distorted exchange rates. Treasury is committed to aggressively and 

vigilantly monitoring and combatting unfair currency practices.

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

attention to their currency practices. An economy meeting two of the three criteria in the 

2015 Act will be 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 one-off factors. 

As an added 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, Taiwan, 

Germany, and Switzerland. 

With regard to these six economies: 

 

• China has a long track record of engaging in persistent, large-scale, one-way foreign 

exchange intervention, doing so for roughly a decade to resist renminbi (RMB) 

appreciation even as its trade and current account surpluses soared. China allowed the 

RMB to strengthen only gradually, so that the RMB’s initial deep undervaluation took an 

extended period to correct. The distortion in the global trading system resulting from 

China’s currency policy over this period imposed significant and long-lasting hardship 

on American workers and companies. Moreover, China continues to pursue a wide 

array of policies that limit market access for imported goods and services, and 

maintains a restrictive investment regime which adversely affects foreign investors. 

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

United States, which underscores the need for further opening of the Chinese economy 

to American goods and services, as well as faster reform to rebalance the Chinese 

economy toward greater household consumption. China’s goods trade surplus with the 

United States, at $347 billion in 2016, is by far the largest among any of the United 

States’ major trading partners. It has also declined by only 5 percent in 2016 from its 

peak in 2015. Further opening of the Chinese economy to U.S. goods and services as 

well as faster implementation of reforms to rebalance the Chinese economy toward 
3

greater household consumption would aid in reducing the bilateral imbalance. In 

comparison to the extremely large and persistent bilateral trade imbalance, China’s 

multilateral external position has undergone greater adjustment in recent years, with 

its current account surplus having decreased most recently from 2.8 percent of GDP in 

2015 to 1.8 percent of GDP in 2016. Further, after engaging in one-way, large-scale 

intervention to resist appreciation of the RMB for a decade, China’s recent intervention 

in foreign exchange markets has sought to prevent a rapid RMB depreciation that would 

have negative consequences for the United States, China, and the global economy. 

Treasury will be scrutinizing China’s trade and currency practices very closely, 

especially in light of the extremely sizable bilateral trade surplus that China has with 

the United States. China will need to demonstrate that its lack of intervention to resist 

appreciation over the last three years represents a durable policy shift by letting the 

RMB rise with market forces once appreciation pressures resume. Treasury places 

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

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

competitive purposes. Treasury also places high importance on greater transparency of 

China’s exchange rate and reserve management operations and goals.

• Japan continues to experience weak demand growth, which has contributed to Japan’s 

trade imbalances, and needs to deploy all policy levers in order to revive domestic 

demand and combat low inflation while avoiding a return to export-led growth. Japan 

has a significant bilateral trade surplus with the United States, with a goods surplus of 

$69 billion. Japan’s current account surplus for 2016 was 3.7 percent of GDP, a 

substantial increase from 3.1 percent in 2015, and the highest annual surplus since 

2010. Japan has not intervened in the foreign exchange market, however, in over five 

years. Treasury’s expectation is that in large, freely-traded exchange markets, 

intervention should be reserved only for very exceptional circumstances with 

appropriate prior consultations. Given that the weakness of domestic activity and 

demand growth are contributing to Japan’s trade imbalances, it is critical that the 

authorities complement accommodative monetary policy and flexible fiscal policy with 

continued implementation of structural reforms focused on enhancing the labor 

market, raising productivity, and improving the long-term economic outlook. 

• Korea has a track record of asymmetric foreign exchange interventions, highlighting the 

urgency of the authorities durably limiting foreign exchange intervention only to 

circumstances of disorderly exchange market conditions and making foreign exchange 

operations more transparent. Korea has a significant bilateral trade surplus with the 

United States, with a goods surplus of $28 billion in 2016. Korea also has an elevated 

current account surplus which stood at 7.0 percent of GDP in 2016. Treasury estimates 

that during 2016 Korea was a net seller of foreign exchange of about $6.6 billion (0.5

percent of GDP). This is in notable contrast to several prior years of asymmetric 

intervention to resist won appreciation. In its last analysis of the won, the IMF 

maintained its assessment that the won is undervalued. This undervaluation supports 

the large current account surplus and reflects continued underperformance of Korean 

domestic demand. Treasury urges Korea to enhance the flexibility of the exchange rate 

and will be closely monitoring Korea’s currency intervention practices. 
4

• Taiwan has a track record of asymmetric foreign exchange interventions, highlighting 

the urgency of the authorities limiting foreign exchange intervention only to 

circumstances of disorderly exchange market conditions and making foreign exchange 

operations more transparent. Taiwan has an extremely large current account surplus 

which stood at over 13 percent of GDP in 2016. In nominal dollar terms, Taiwan has the 

fifth largest current account surplus in the world at $71 billion. Treasury estimates that 

in 2016 Taiwan made net purchases of $10 billion in foreign exchange, amounting to 

1.8 percent of GDP, with the majority of those purchases in the first three quarters. This 

meant that 2016 was the first time in several years that Taiwan’s net purchases of 

foreign exchange were below 2 percent of GDP. Treasury urges Taiwan’s authorities to 

demonstrate a durable shift to a policy of limiting foreign exchange interventions to 

only exceptional circumstances of disorderly market conditions, and to increase the 

transparency of foreign exchange market intervention and reserve holdings.

• Germany, the largest economy within the euro area, should take policy steps –

particularly greater use of fiscal policy – to encourage stronger domestic demand 

growth, which would place upward pressure on the euro’s nominal and real effective 

exchange rates and help reduce its large external imbalances. Germany has a very large 

bilateral goods trade surplus with the United States, at $65 billion, and an extremely 

large current account surplus at 8.3 percent of GDP in 2016. In nominal dollar terms, 

Germany has the world’s largest current account surplus at close to $300 billion. This 

surplus represents a substantial excess of German income over German domestic 

absorption. Stronger demand growth in Germany will be a key factor going forward, as 

will be addressing Germany’s low real effective exchange rate. The European Central 

Bank (ECB) has not intervened in foreign currency markets since 2011, and did so then 

as part of a G-7 concerted intervention to stabilize the yen following Japan’s earthquake 

and tsunami.4 

• Switzerland over the past few years has used foreign exchange purchases to help 

counter persistent pressures from safe haven inflows and deflationary forces. 

Switzerland has space to deploy fiscal policy more forcefully to support domestic 

economic activity, and could also rely more heavily on traditional monetary policy tools 

(e.g., interest rates) to combat deflationary pressures, which would help reduce the 

need for foreign exchange intervention. Switzerland has a large current account 

surplus at 10.7 percent of GDP, and the sixth largest surplus in the world in nominal 

dollar terms at $71 billion. Per Treasury estimates, Switzerland has engaged in sizable, 

one-sided foreign exchange purchases over the last year. The IMF has found the Swiss 

franc to be overvalued. Though Switzerland’s economic policy situation is distinctive 

given its small stock of domestic assets, which limits monetary policy options to 

address persistent deflation and safe haven inflows, Switzerland could increase reliance 

on policy rates in order to limit the need for foreign exchange interventions, which 

should be made more transparent.

 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. 
5

Section 1: Global Economic and External Developments

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

months of 2016 and, where data are available, developments through end-March 2017. 

The economies covered in this Report are the 12 largest trading partners of the United 

States. Their total goods trade with the United States amounted to nearly $2.6 trillion over 

the last 12 months, or around 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 2016). 

U.S. Economic Trends

In the fourth quarter of 2016, private domestic demand provided strong support for the 

continued expansion of the U.S. economy. Consumer spending grew solidly, while business 

fixed investment, residential investment, and inventory accumulation all made positive, if 

smaller, contributions. On the public side, government expenditures made a slightly

positive contribution to GDP; on the international side, a sharp drop in net exports between 

the third and fourth quarters introduced a major drag to GDP, although an unusually high 

level of agricultural exports in the third quarter contributed to the size of the decline. 

Despite the slower growth that falling net exports caused in the fourth quarter, the U.S. 

economy closed 2016 with considerable underlying strength as evidenced by strong job 

creation, low unemployment, and rising wages and incomes. Over the last two quarters of 

the year, real GDP expanded at a 2.8 percent annual rate after rising at a much slower 1.1 

percent annual rate in the first half. A resumption of inventory accumulation in the latter 

half of 2016 accounted for much of the acceleration – contributing 0.8 percentage point to 

growth during the second half of the year after pulling it down by 0.8 percentage point 

during the first half. Business fixed investment added 0.2 percentage point during the 

second half of 2016, after posing a drag of that size in the first half. Residential investment 

added 0.1 percentage point in the second half of 2016, after an essentially flat contribution 

during the first half. Consumer spending, which accounts for just over two-thirds of all 

economic activity in the United States, grew at a very solid 3.2 percent in the second half of 

2016, after growing at 3.0 percent in the first half of the year. 

Near-Term U.S. Growth Outlook

Solid fundamentals, including strong labor markets, buoyant consumer sentiment, steady 

gains in household wealth, and rising construction spending all point to healthy growth in 

private domestic demand over 2017. A consensus of private forecasters predicts that real 

GDP will expand at a solid 2.1 percent in the first half of 2017 and then accelerate to 2.4 

percent in the second half of the year. Overall, they expect GDP growth of 2.2 percent for 

the whole of 2017, a step up from the 1.9 percent rate reached in 2016.
6

Fiscal Policy and Public Finances

After weighing on U.S. economic activity in recent years, the rapid pace of fiscal 

consolidation has moderated in recent quarters. During the latter half of 2016, federal 

government spending made a slightly positive contribution to real GDP growth, after 

subtracting 0.1 percentage point during the first half of the year. State and local outlays 

added roughly 0.1 percentage point to growth in the first and second halves of 2016. 

Looking ahead, federal government fiscal spending is expected to make a negative 

contribution to growth in the first quarter of 2017 but to turn modestly positive over the 

rest of the year. Beyond 2017, the impacts of any fiscal easing will depend on the final tax 

and budgetary legislation. Overall, the Administration’s current policy proposals are more 

focused on boosting private domestic demand through tax relief than on increasing 

government consumption directly.

In FY2016, the federal budget deficit was 3.2 percent of GDP, up from 2.5 percent of GDP in 

FY2015. Debt held by the public rose to $14.2 trillion in FY2016. As a share of the 

economy, publicly held debt rose from 73.7 percent at the end of FY2015 to about 77.1 

percent of GDP in FY2016.

Labor Market and Inflation Trends

The pace of job creation has remained strong in recent months, and the unemployment rate 

has fallen further. Nonfarm payroll employment rose by 187,000 jobs per month, on 

average, during 2016, and for the six months ending in March 2017, monthly gains 

averaged 163,000. The unemployment rate currently stands at 4.5 percent, less than half 

its 2009 peak of 10 percent. Other indicators also point to declining slack in U.S. labor 

markets: involuntary part-time employment has fallen below its pre-recession average, 

and the labor force participation rate has been rising, although it has not fully recovered to 

its pre-recession level.

Headline inflation has turned up from mid-2016 with the recovery in energy prices but 

remains moderate, while core inflation (which excludes food and energy prices) remains 

relatively low and stable. The consumer price index rose 2.7 percent during the year 

ending February 2017, compared with a 1.0 percent rise over the year ending February

2016. Core consumer prices were up 2.2 percent over the year ending February 2017, a 

tick lower than the 2.3 percent increase during the same period a year earlier. By some 

measures, growth of compensation has strengthened over the past year, but remains below 

its pre-recession norms. Average hourly earnings rose 2.3 percent over the twelve months 

ending February 2017, stepping up from an average annual rate of 2.0 percent from 2011 

through 2014. The Employment Cost Index for private industry workers showed total 

compensation rising 2.2 percent over the twelve months ending December 2016, up from a 

rate of 1.9 percent in the preceding year.
7

U.S. Current Account and Trade Balances

The U.S. current account was in deficit by 2.4 percent of GDP in the second half of 2016, 

narrowing from the 2.8 percent deficit in the first half of the year. This decline in the 

current account deficit was supported by a pick-up in net investment income, which rose 

by $25 billion in the second half of 2016 compared to the first half of the year, as earnings 

on U.S. assets abroad rose despite an appreciation of the dollar. On a year-over-year basis 

the U.S. current account balance remained unchanged in 2016 relative to 2015 at 2.6 

percent of GDP.

After narrowing substantially in 

the aftermath of the global 

financial crisis, the non-oil goods 

balance – which consists 

predominantly of manufactured 

goods – has gradually widened 

and is approaching its pre-crisis 

level, at 3.6 percent of GDP in the 

second half of 2016 (compared 

to an average level a bit above 4 

percent of GDP from 2004-

2006). The adjustment in the 

goods balance relative to its precrisis level has come almost 

entirely through the fall in the 

U.S. petroleum deficit, which has 

reached its lowest level since 

1998 and stood at just 0.4 

percent of GDP in the second half 

of 2016 due to increased 

domestic oil production and 

lower world oil prices. 

At the end of 2016, the U.S. net 

international investment 

position stood at a deficit of $8.1 trillion (43.7 percent of GDP), a deterioration of $829 

billion compared to end-2015. The value of U.S.-owned foreign assets was $23.9 trillion, 

while the value of foreign-owned U.S. assets stood at $32.0 trillion. Recent deterioration 

has been due in part to valuation effects from an appreciating dollar that lowered the dollar 

value of U.S. assets held abroad denominated in foreign currencies, as well as the relative 

underperformance of foreign equity markets compared to U.S. stock markets in 2016.

International Economic Trends

The global economy grew by 3.1 percent in 2016, the lowest rate since the end of the global 

financial crisis. Global activity was tepid in the first half of 2016, but firmed somewhat over 

-5

-4

-3

-2

-1

0

1

2

3

H1-2010H2-2010H1-2011H2-2011H1-2012H2-2012H1-2013H2-2013H1-2014H2-2014H1-2015H2-2015H1-2016H2-2016

Percent of GDP

U.S. Current Account Balance

Income Services Goods Current Account Balance

Sources: U.S. Bureau of Economic Analysis; Haver Analytics

-7

-6

-5

-4

-3

-2

-1

0

2005 2007 2009 2011 2013 2015

Percent of GDP

U.S. Goods Balance

Non-Oil Balance

Oil Balance

Source: U.S. Bureau of Economic Analysis
8

the second half of the year as growth accelerated in several large economies (including the 

United States, Japan, and UK). Growth in emerging market economies was generally 

lackluster over 2016. Despite the firming of oil prices in the latter part of the year, 

conditions remain challenging for many commodity-dependent economies. Growth in 

China was solid through the end of 2016, but the necessary efforts to rebalance China’s 

economy continue to generate spillovers for other economies given the reduction in 

commodity demand and still-significant excess capacity in key sectors.

An uptick in term premia over 

late 2016 and early 2017 

suggests some firming in 

forward-looking growth 

expectations, while the rise in 

oil prices has helped diminish 

headline deflationary 

pressures. However, the 

recovery from the global 

financial crisis has been 

markedly slow and the growth 

outlook remains unimpressive 

by historical standards. The 

IMF, in its January 2017 

forecast, projects that advanced economies will pick up modestly over the next two years, 

expanding to 1.9 percent in 2017 and 2 percent in 2018. While this would represent an 

improvement over the middling 1.6 percent average pace of growth since 2011, it is still 

well below the 2.7 percent pace of growth advanced economies averaged from 1990-2006. 

Emerging market economy growth is expected to pick up to 4.5 percent in 2017, remaining 

a bit below the 4.9 percent pace it has averaged since 2011.

Global Imbalances

The distribution of global demand remains highly imbalanced, with large and sustained 

external surpluses in a handful of economies, which has the effect of absorbing demand 

from the rest of the world and dampening global aggregate demand. Though global current 

account imbalances are well below their pre-crisis level, progress in reducing imbalances 

has stalled, with global imbalances as of end-2016 at roughly the same level as in mid-2014 

(after rising modestly and then falling back over the last couple of years). Imbalances have 

been contained in part over the last 18 months by lower oil prices. More broadly, global 

imbalances have fallen since the global financial crisis due primarily to compression of 

imports in deficit economies rather than stronger demand in surplus economies.

The very large surpluses of Germany, Japan, Korea, Taiwan, and Switzerland have each 

remained significant as a share of GDP in the second half of 2016. The surpluses (excess of 

saving over investment) of these economies totaled around $710 billion over the four 

quarters of 2016. China’s surplus declined from 2.8 percent of GDP in 2015 to 1.8 percent 

of GDP in 2016, though external rebalancing in China has reversed somewhat since the

-2

0

2

4

6

8

Percent (year-over-year)

GDP Growth

H1 2016 H2 2016 2011-2015 Avg

Sources: National Authorities; Haver Analytics.
9

trough in China’s reported current account surplus in 2013. Outside of a few smaller 

exceptions (India, France, and Switzerland), none of the United States’ 12 major trading

partners have contributed to global rebalancing over the last three years, as large surplus 

economies have generally seen their surpluses expand. This indicates that these 

economies are absorbing demand from the rest of the world to sustain stronger growth at 

home than would otherwise be the case. 

-3

-2

-1

0

1

2

3

2005Q1 2007Q1 2009Q1 2011Q1 2013Q1 2015Q1

Percent of Global GDP

(Trailing 4Q Sum)

China Germany Other Euro Area

Other Surplus Other East Asia Oil

Discrepancy Other Deficit US

Global Current Account Imbalances

Sources: Haver Analytics; IMF WEO; and National Authorities

China

Canada Mexico

Japan Germany

South Korea

U.K.

France

India

Taiwan

Italy

Switzerland

U.S.

-4

-3

-2

-1

0

1

2

3

4

5

-7 -3 1 5 9 13

3-Year Change in Balance (% of GDP)

Sources: Haver Analytics; IMF WEO; National Authorities

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

Global Current Account Balances - Adjustment 2013-2016 

2016 Current Account Balance (% of GDP)

Shrinking CA Deficit Growing CA Surplus

Growing CA Deficit Shrinking CA Surplus
10

This weak and imbalanced pattern of global aggregate demand highlights the urgency of 

deploying all policy levers to boost strong, sustainable, balanced, and inclusive growth. 

Inadequate macroeconomic policy support has been a persistent feature of the global 

policy landscape following the financial crisis. Monetary policy responses have been 

forceful generally, but they need to be buttressed by additional fiscal support to deliver a 

stronger boost to domestic demand. Policy space exists as exceptionally low long-term 

interest rates provide governments with more fiscal breathing room than under 

historically normal circumstances. This policy prescription is particularly relevant for 

many key economies with large external surpluses where investment has exhibited notable 

weakness in recent years. While the slowdown in global trade growth is in part a 

consequence of the weakness of global demand (and particularly investment), it is 

exacerbated by the failure of economies to dismantle trade barriers that prevent a level 

playing field globally. Stronger efforts to create a more level playing field for private firms 

vis-à-vis state-owned enterprises in several key economies, notably China, would also help 

make growth stronger and trade more fair.

Capital Flows 

As in 2015, private capital 

flowed out of China in 2016, 

while net capital flows to other 

emerging markets were largely 

flat in the aggregate. Net private 

outflows from China continued 

to be driven by Chinese capital 

leaving the country rather than a 

broader flight of foreign private 

capital. Net outflows from China 

have been driven in part by

increased direct investment 

overseas by Chinese corporates, 

including state-owned enterprises. However, the pace of outflows has remained 

considerably below that seen in the second half of 2015, and tightened enforcement of 

capital controls appears to have helped stem outflows in early 2017.

Other emerging markets continued to receive modest net capital inflows in the second and 

third quarter of 2016. Despite a deceleration of inflows in the third quarter, private capital 

recorded a net inflow into emerging markets excluding China in 2016, in line with the 

modest net inflow recorded in 2015. Portfolio inflows into debt assets continued into the 

third quarter, while inflows into equity assets were also positive, albeit small. The capital 

flows appeared to be broadly dispersed across the major emerging market economies and 

across regions. Emerging market sentiment was supported in part by the firming of 

commodity prices, as major oil producers reached agreement on a global production freeze, 

raising prices and alleviating stresses on commodity exporters. 

-800

-600

-400

-200

0

200

400

600

2000 2002 2004 2006 2008 2010 2012 2014 2016

USD Billions

Capital Flows to Emerging Markets

EM excluding China China

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

2016 figures annualized based on data through Q3 2016.

Source: International Monetary Fund 
11

At the end of 2016, and again in March 2017, the Federal Reserve raised the policy interest 

rate corridor, as widely expected, without causing any notable turbulence in U.S. or global 

financial markets. 

Foreign Exchange Markets

The dollar appreciated on a 

nominal, trade-weighted basis 

by 5.4 percent over the second 

half of 2016, more than 

reversing a near 1 percent 

depreciation in the first half of 

the year. The dollar’s strength 

was broad-based, appreciating 

against most major and 

emerging market currencies 

alike. The majority of the 

dollar’s appreciation in the 

second half of the year took 

place following the U.S. election 

in November.

Most advanced economy 

currencies outside the United 

States depreciated on a nominal, 

trade-weighted basis in the 

second half of 2016. In part this 

reflected the broad 

strengthening of the dollar. It 

also reflected country-specific 

developments: the British pound 

depreciated an additional 4 

percent in the second half of 

2016 (after depreciating 11 percent in the first six months of the year), as markets 

continued to process the implications of the June referendum outcome. The Japanese yen 

depreciated 9 percent in the second half of 2016, partly retracing upward movements in 

the first half of the year, as the Bank of Japan (BOJ) kept the 10-year yield around zero 

(consistent with its new monetary policy regime), even as yields in the U.S. and other major 

economies rose late in the year. 

Emerging market currencies continued to follow different paths into the end of 2016 based 

on regional developments. The Mexican peso depreciated sharply following the U.S. 

election, bringing the cumulative 2016 decline to almost 15 percent. Other emerging 

market currencies showed more resilience to U.S. policy developments, including the 

normalization of monetary policy by the Federal Reserve, as the Taiwanese dollar and 

-20 -15 -10 -5 0 5 10 15 20

Taiwan

Canada

Switzerland

China

Korea

Euro

UK

Japan

Mexico

Percent Change

H1 2016

H2 2016

Q1 2017

Sources: FRB; Haver Analytics.

U.S. Dollar vs. Major Trading Partner Currencies

(+ denotes dollar appreciation)

-20

-10

0

10

20

U.S.

Taiwan

India

Korea

Switzerland

China

Euro

Canada

UK

Mexico

Japan

Percent

Nominal Effective Exchange Rates

H1 2016 H2 2016

Source: Bank for International Settlements
12

Indian rupee appreciated 4.6 percent and 3.5 percent, respectively, on a broad, tradeweighted basis in the second half of the year. 

In the first quarter of 2017, the dollar reversed course, depreciating 3.0 percent on a 

nominal, trade-weighted basis in the first quarter of the year, retracing at least a portion of 

its movement in the second half of 2016 against all other currencies covered in the Report. 

Conversely, several emerging market currencies started 2017 on a stronger foot: The 

Mexican peso retraced some of its 2016 decline, rising over 9 percent through end-March 

on a nominal, trade-weighted basis as the central bank implemented measures to defend 

the peso and enhance liquidity, and as statements from U.S. officials allayed concerns over

regional economic relationships. In Asia, the Korean won and Taiwanese dollar 

appreciated roughly 5.5 and 4.4 percent, respectively, close behind the peso as the 

strongest performing emerging market currencies in early 2017. 

Treasury judges that foreign exchange markets have generally functioned smoothly, 

including around the U.S. election in November and increases in the Federal Reserve’s 

policy rate corridor in both December and mid-March. The U.S. dollar continues to be the 

world’s principal currency in international trade, with it being bought or sold in 88 percent 

of all currency trades according to the most recent (2016) BIS Triennial Survey of foreign 

exchange activity.

Foreign Exchange Reserves 

Global foreign currency reserves 

declined on net over 2016 by 

roughly $105 billion, down from 

roughly $10.9 trillion at the end 

of 2015. Reserves rose globally 

by almost $190 billion over the 

first half of 2016, but then 

declined by over $290 billion in 

the second half of the 

year. Notwithstanding this 

volatility, the net decline in 

global reserves in 2016 extends 

the notable fall witnessed over 

2015, as many economies 

engaged in dollar and other 

reserve asset sales to stem or slow the depreciation of their currencies. At an individual 

economy level, the 2016 annual change in reserves was roughly commensurate with 

changes in 2015, outside of China, where the drawdown on reserves was much smaller in 

2016 than 2015. 

China accounts for nearly the entirety of the global reserve decline again in 2016, and 

Chinese reserves fell by over $300 billion to around $3 trillion by the end of 2016. Reserve 

-350 -250 -150 -50 50 150

World

Switzerland

Japan

India

Euro Area

UK

Taiwan

Canada

Korea

Mexico

China

USD Billions

(Change Dec. 2015 - Dec. 2016)

H1 2016 H2 2016

Note: Includes valuation effects

Sources: International Monetary Fund; Haver Analytics

Change in Foreign Currency Reserves
13

holdings among other economies covered in this Report, except Japan, all increased 

through the second half of 2016 and on net over the year. 

China, Korea, Taiwan, and Switzerland do not publish their foreign exchange intervention 

activities so it is not possible to separate precisely transactions from valuation 

adjustments. These economies continue to maintain ample – or more than ample –

amounts of foreign currency reserves, when compared to either their stock of short-term 

liabilities or domestic GDP. 

Economic Developments in Selected Major Trading Partners

China

China engaged in large-scale, one-way foreign exchange intervention for roughly a decade 

to resist RMB appreciation even as its trade and current account surpluses soared. China 

allowed the RMB to strengthen only gradually, so that the RMB’s initial deep 

undervaluation took an extended period to correct. The distortion in the global trading 

system resulting from China’s currency policy over this period imposed significant and 

long-lasting hardship on American workers and companies. 

China’s current account surplus, though it has declined significantly as a share of GDP from 

its peak of 10 percent of GDP in 2007, remains among the largest in the world in nominal 

terms at over $200 billion. China’s trade and current account surpluses declined in 2016, 

and the RMB remained under downward pressure throughout the year due to sizable 

capital outflows estimated at around $700 billion. China’s current account surplus was 1.8

percent of GDP in 2016, down from 2.8 percent of GDP in 2015. The narrowing of the 

current account surplus was driven by an increase in the services trade deficit and a 

decline in the goods trade surplus. Chinese exports declined, as export volume increased 

1.8 percent but value declined 0.7 percent in 2016. During the same period, goods import 

Table 1: Foreign Exchange Reserves

India 427% 15%

China 399% 27%

Mexico 334% 16%

Korea 330% 26%

Taiwan 277% 82%

Switzerland 63% 96%

Japan 45% 23%

Canada 13% 5%

Italy 5% 2%

UK 2% 4%

Germany 2% 1%

France 2% 2%

Reserves and GDP for 2016, short-term debt as of 2016Q3

Sources: National Authorities; World Bank; International 

Monetary Fund; Haver Analytics

FX Reserves as % of 

short term debt

FX reserves as

% of GDP
14

volumes grew 3.6 percent, but 

declined 0.4 percent in nominal 

terms reflecting lower prices on 

commodity imports. Tourism 

imports (travel spending 

abroad) continued to drive 

China’s services trade deficit, 

which grew from 1.6 percent of 

GDP in 2015 to 2.2 percent of 

GDP in 2016. 

Bilaterally with the United 

States, China runs a very large 

goods trade surplus but a small services deficit. In 2016, China’s goods trade surplus with 

the United States fell somewhat, from $367 billion in 2015 to $347 billion, according to U.S. 

Census data. Both exports to and imports from China fell in 2016, with a larger import 

decline, leading to a smaller bilateral deficit. The U.S. services trade surplus with China 

increased by $4 billion to $37 billion bringing the overall trade deficit (goods and services)

to $310 billion.

China’s currency weakened in 

2016 by several measures. The 

CFETS basket – the most 

commonly referenced nominal 

trade-weighted basket –

weakened 6.1 percent in 2016 

and 10.1 percent from its peak 

in August 2015 to end-2016. 

Meanwhile, the RMB 

depreciated 6.5 percent against 

the dollar in 2016 and 10.6 

percent from August 2015 to 

end-2016. On a real, tradeweighted basis, China’s currency 

depreciated 5.7 percent in 2016. 

This depreciation occurred in the 

context of an estimated $700 

billion in net capital outflows and 

an estimated $435 billion in 

foreign exchange sales by China 

to mitigate depreciation 

pressures.

While China does not publish its 

foreign exchange intervention, 

using data that China does 

88

92

96

100

104

108

88

92

96

100

104

108

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

Indexed December 2014 = 100

China: Exchange Rates

CFETS USD/RMB Daily Close

Sources: CFETS; Bloomberg; U.S. Treasury Estimates

90

100

110

120

130

140

150

160

90

100

110

120

130

140

150

160

Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15

Indexed December 2005 = 100

China: Exchange Rates

REER NEER

Sources: BIS; U.S. Treasury Estimates

-5

0

5

10

20062007

200820092010201120122013201420152016

Percent of GDP

China: Current Account Detail

Income Services Goods Current Account Balance

Source: Haver Analytics
15

publish, Treasury estimates that China intervened heavily in the foreign exchange market 

to prevent a more rapid RMB depreciation. Treasury estimates that from August 2015 

through February 2017, China sold around $800 billion in foreign currency assets to 

prevent rapid RMB depreciation. The pace of net foreign exchange sales appears to have 

abated somewhat in early 2017 

amid strengthened enforcement 

of existing capital controls and

stronger economic activity 

indicators. Despite these 

sizeable foreign currency sales 

since August 2015, China still has 

ample foreign reserves of 

roughly $3 trillion as of endFebruary 2017. 

Market participants remain 

highly sensitive to signals from 

the Chinese authorities on the exchange rate, highlighting the importance of clear 

communication of policy actions and greater transparency. China should make further 

efforts to clarify its exchange rate and reserve management operations and goals, and 

continue to underscore that devaluation will not be used to support domestic growth. 

China will need to demonstrate that its lack of intervention to resist appreciation over the 

last three years represents a durable policy shift by letting the RMB rise with market forces 

once appreciation pressures resume. 

Treasury is concerned by the lack of progress made in reducing the bilateral trade surplus

with the United States. China continues to pursue a wide array of policies that limit market 

access for imported goods and services, and maintains a restrictive investment regime 

which adversely affects foreign investors. Further opening of the Chinese economy to U.S. 

goods and services as well as faster implementation of reforms to rebalance the Chinese 

economy toward greater household consumption would aid in reducing the bilateral 

imbalance. 

Japan

While Japan has run consistent current account surpluses for decades, the trade balance 

was in deficit between 2011 and 2015 before reverting to surplus in 2016. Japan’s current 

account surplus widened in 2016 to 3.7 percent of GDP or $183 billion, a substantial 

increase from 3.1 percent in 2015 and the highest annual surplus since 2010. The current 

account surplus is largely due to Japan’s net foreign income surplus, although the trade 

balance is an increasingly important driver. Japan’s seasonally adjusted trade balance 

(goods and services) turned to a surplus in late-2015 and widened in 2016 on contracting 

imports. While the trade balance appears to have peaked in mid-2016, Japan continues to 

register surpluses not seen since the Great East Japan Earthquake in 2011. 

-150

-100

-50

0

50

100

Jan-14

Mar-14

May-14

Jul-14

Sep-14

Nov-14

Jan-15

Mar-15

May-15

Jul-15

Sep-15

Nov-15

Jan-16

Mar-16

May-16

Jul-16

Sep-16

Nov-16

Jan-17

Billion U.S. Dollars

China: Estimated Intervention

FX Assets on PBOC Balance Sheet Bank FX Settlement

Sources: PBOC; SAFE; U.S. Treasury Estimates
16

Japan’s goods trade surplus with 

the United States in 2016 was 

$69 billion, roughly unchanged 

from 2015. As Japan runs a 

services trade deficit with the 

United States, Japan’s overall 

bilateral trade surplus (goods

and services) was $56 billion in 

2016, a marginal increase from 

$55 billion in 2015. Treasury is 

concerned by the persistence of 

the large bilateral trade 

imbalance between the United States and Japan. 

The level of the dollar-yen exchange rate ended 2016 virtually unchanged from where it 

started the year despite considerable variation over the year. The yen appreciated to a 

2016 high of JPY/USD 99 in mid-August, following repatriation of overseas retained 

earnings at fiscal-year’s end in March and safe haven inflows in the aftermath of the UK 

referendum in June. The yen then traded in a range of JPY/USD 100-105 until the U.S. 

election in November, after which the yen depreciated against the dollar. On a real 

effective basis, the yen 

appreciated 6.3 percent in 2016. 

It appreciated 1.0 percent in the 

first two months of 2017. There 

is little evidence that the yen is 

overvalued. The real effective 

yen is twenty percent weaker 

than its 20-year historical 

average, and the IMF’s most

recent assessment found the yen 

to be “broadly consistent with 

medium-term fundamentals.” 

Japan has not intervened in the 

foreign exchange market in over five years. Treasury’s expectation is that in large, freelytraded exchange markets, intervention should be reserved only to very exceptional 

circumstances with appropriate prior consultations, consistent with Japan’s G-7 and G-20 

commitments. 

Japan has experienced five consecutive years of real GDP growth, but the average rate has 

been just 1.2 percent. Domestic demand growth the past three years has been especially 

weak, averaging just 0.5 percent. 

Japanese authorities continue to seek a durable exit from deflation. The BOJ in 2016 

shifted its policy framework from targeting monetary base expansion to “yield curve 

control,” or targeting short-term interest rates as well as 10-year government bond yields. 

The BOJ also adopted an “inflation-overshooting commitment” to further support inflation 

-4

-2

0

2

4

6

20062007200820092010201120122013201420152016

Percent of GDP

Japan: Current Account Detail

Income Services Goods Current Account Balance

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

60

80

100

120

140

160

60

80

100

120

140

160

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

Indexed December 2005 = 100

Japan: Yen Exchange Rates

NEER REER JPY/USD spot

Sources: Bank of Japan; Bank for International Settlements
17

expectations. The recent rise in energy prices has helped boost headline inflation, but the 

domestic economy has not been strong enough to generate sufficient demand-pull inflation. 

On the fiscal front, in May 2016 the government postponed until October 2019 a planned 

further increase in the consumption tax rate. In August, the government announced a 

stimulus package of 1.3 percent of GDP. The IMF estimates this package will provide a 

modest fiscal impulse for 2016 and 2017. 

Given continued weak demand growth and exceptionally low inflation, it remains 

important that the authorities combat these trends using all policy levers. This means 

complementing accommodative monetary policy and flexible fiscal policy with continued 

implementation of structural reforms focused on the labor market, raising productivity, 

and improving the long-term economic outlook. 

Korea

Korea’s current account surplus 

increased materially following 

the global financial crisis, 

peaking at 7.7 percent of GDP in 

2015, driven predominately by 

goods exports. The current 

account surplus declined slightly 

to 7.0 percent of GDP in 2016. 

The decline was largely due to a 

widening of the services deficit 

and a decrease in the goods 

surplus. 

Korea’s goods trade surplus with the United States totaled $28 billion in 2016, while the 

combined goods and services surplus was lower at $17 billion. In the last six months of 

2016, Korea’s goods trade surplus with the United States totaled $11 billion. The combined 

goods and services surplus was $6 billion over the same period. Treasury is concerned by 

the persistence of the large bilateral trade imbalance between the United States and Korea. 

In 2016, the won depreciated 2.6

percent against the dollar, but 

appreciated 0.7 on a real 

effective basis. Year-to-date in 

2017, through February, the won 

has appreciated 6.8 percent 

against the dollar and 3.1 

percent on a real effective basis. 

In its last analysis, the IMF 

maintained its assessment that 

the won is undervalued. 

-5

0

5

10

20062007200820092010201120122013201420152016

Percent of GDP

Korea: Current Account Detail

Income Services Goods Current Account Balance

Source: Haver Analytics

60

70

80

90

100

110

120

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

Indexed December 2005 = 100

Korea: Exchange Rates

REER NEER KRW/USD

Sources: International Monetary Fund; U.S. Treasury Estimates
18

Korea does not publish its foreign exchange market intervention. Treasury estimates that 

in the second half of 2016 the Korean authorities intervened both to resist appreciation 

and to resist depreciation of the won, and that on net Korea bought an estimated $2.4

billion in foreign exchange. In 

2016 overall, Treasury assesses 

that on net the authorities 

intervened to support the won, 

selling an estimated $6.6 billion 

(0.5 percent of GDP) in foreign 

exchange, including activity in 

the forward market. 

Korea has committed in the G-20 

to refrain from competitive 

devaluation and to not target its 

exchange rate for competitive 

purposes. Korea has well-developed institutions and markets, and should limit currency 

intervention to only exceptional circumstances. Korea maintains ample reserves at $365 

billion as of January 2017, equal to more than three times gross short-term external debt 

and 26 percent of GDP. Treasury also believes that there should be full transparency of 

foreign exchange operations, and that any macroprudential or capital flow measures 

should not target the level of the exchange rate.

Korea’s trend GDP growth has been slowing over the last several years, and ongoing 

political uncertainty has led the IMF and the Bank of Korea to further lower their growth 

forecasts for 2017. Exports continue to play a dominant role in the Korean economy 

(almost 50 percent of GDP), which highlights the need for Korea to continue rebalancing 

toward domestic demand – a process that would be helped by won appreciation over the 

medium-term. Korea should use all policy levers to support growth. The Bank of Korea 

has cut its policy rate five times since August 2014, most recently in June 2016 to 1.25 

percent. The Korean authorities have also announced several fiscal measures in the last six 

months, but the IMF still projects fiscal consolidation of 0.2 percent of GDP in 2016 and 0.5 

percent of GDP in 2017. With a debt to GDP ratio of around 40 percent, Korea has the fiscal 

space to support the economy more strongly than it has thus far – including through 

structural fiscal reforms to support household consumption and bring down elevated 

savings rates – in order to raise domestic demand and avoid reliance on net exports to 

drive growth going forward. 

Taiwan

Taiwan has a large current account surplus that has risen significantly over the last decade 

to become the fifth largest in the world in nominal terms, and has engaged in persistent net 

foreign currency purchases over the last few years. Taiwan’s current account surplus for 

2016 was $71.0 billion (13.4 percent of GDP), slightly smaller than the $75.4 billion 

(14.3 percent of GDP) in 2015. Taiwan’s goods trade surplus remained essentially 

unchanged in 2016 at $27 billion.

-8

-4

0

4

8

Jan-2016

Feb-2016

Mar-2016

Apr-2016

May-2016

Jun-2016

Jul-2016

Aug-2016

Sep-2016

Oct-2016

Nov-2016

Dec-2016

Jan-2017

Feb-2017

Billion U.S. Dollars

Korea: Estimated Intervention

Change in Net Forward Book Spot Market Intervention

Sources: Bank of Korea; U.S. Treasury estimates 

February 2017 forward book not yet available
19

In 2016, Taiwan’s goods trade 

surplus with the United States 

was $13 billion, about $2 billion 

less than in 2015. The U.S. 

services trade surplus with 

Taiwan decreased by $0.5 billion 

to $4.2 billion in 2016, bringing 

the overall trade deficit (goods 

and services) down to $9.1 

billion. 

In 2016, the new Taiwan dollar 

(NTD) appreciated 1.4 percent 

against the dollar, after 

depreciating 3.9 percent in 2015. 

In the first three months of 2017, 

the NTD further appreciated by 

7.0 percent. The currency 

appreciated 5.0 percent on a real 

effective basis in 2016. Taiwan 

officially maintains a managed 

peg exchange rate. 

Taiwan does not publish its 

foreign exchange interventions. 

Treasury estimates that 

Taiwan’s authorities made net 

foreign currency purchases in

2016 averaging nearly $1 billion 

per month. Treasury estimates 

suggest that Taiwan intervened 

only minimally in currency 

markets in the fourth quarter of 

2016, but purchased as much as 

$2.9 billion in foreign currency 

in January February 2017. 

Taiwan has abundant foreign 

exchange reserves, totaling $435 

billion (82 percent of GDP and 277 percent of short-term external liabilities) at the end of 

2016, an increase of $8 billion from the end of 2015. 

The IMF does not currently publish a valuation assessment of the NTD. However, outside 

analysts have assessed that the NTD is undervalued by as much as 26 percent.5 Treasury 

 5 “Estimates of Fundamental Equilibrium Exchange Rates,” William R. Cline, Peterson Institute for 

International Economics, November 2016.

-5

0

5

10

15

20

20062007200820092010201120122013201420152016

Percent of GDP

Taiwan: Current Account Detail

Income Services Goods Current Account Balance

Source: Haver Analytics

85

90

95

100

105

110

115

85

90

95

100

105

110

115

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

Indexed December 2005 = 100

Taiwan: Exchange Rates 

NEER REER TWD/USD spot

Sources: Taiwan central bank; BIS

-4

-2

0

2

4

6

Jan-2015

Mar-2015

May-2015

Jul-2015

Sep-2015

Nov-2015

Jan-2016

Mar-2016

May-2016

Jul-2016

Sep-2016

Nov-2016

Jan-2017

Billion U.S. Dollars

Taiwan: Estimated Intervention

Preferred method* FX valuation-adjusted method

Sources: Taiwan central bank; U.S. Treasury estimates

* Using change in net foreign assets and interest income estimates
20

believes Taiwan should make its foreign exchange operations and reserve management 

more transparent. Although not a member of the IMF, Taiwan uses the IMF’s Special Data 

Dissemination Standard (SDDS) framework to provide data on many aspects of its 

economy, including the real, fiscal, financial, and many of the external sector accounts. 

Taiwan does not, however, publish data on the full details of its international reserves in 

accordance with the SDDS reserves template, standing out as the only major emerging 

market economy in Asia not to do so.

Germany and the Euro Area

The euro area is a currency union in which there has been considerable dispersion across 

members in terms of the quality of economic performance, and this has affected the euro 

exchange rate such that some individual country real effective exchange rates appear to be 

undervalued relative to that country’s economic fundamentals. 

Overall, the euro area grew at a pace of 1.7 percent in 2016, which was a bit slower than 

the 2.0 percent pace in 2015. Spain and Germany grew faster at 3.2 and 1.9 percent, 

respectively, but growth was lower in France (1.2 percent) and Italy (0.9 percent, which 

nonetheless represented Italy’s best growth performance since 2010).

The real euro is currently 10 percent weaker than the monthly-average real euro since 

2000. On a bilateral basis, over the same time period, the euro is 12 percent weaker 

against the dollar. Persistent weaknesses in some of the peripheral euro area economies, 

including Greece, Italy, and others, have contributed to uncertainty about the resilience of 

the monetary union and have effectively weakened the euro over the last several years, 

both against the dollar and on a nominal and real effective basis. Euro area monetary 

policy has had an effect as well, as easing by the ECB has opened a sizable gap in interest 

rates and bond yields between the United States and the euro area. 

The combination of a relatively weak currency plus weak domestic demand (averaging just 

0.5 percent per year the last six years), has led to a significant widening of the euro area’s 

current account surplus from 0.2 percent of GDP in 2009 to 3.4 percent in 2016. Much of 

this has been driven by a rapid increase in Germany’s surplus, which is now the largest 

nominal surplus in the world at $287 billion. Germany’s real effective exchange rate has 

depreciated by 10 percent since 2009, a shift that would be counterintuitive in light of 

Germany’s large and persistent current account surplus but for its membership in the 

monetary union. In addition to the exchange rate, Germany’s excessively large surplus also 

reflects weak domestic investment, a declining share of private consumption to GDP, and 

lower commodity prices. 

Germany’s bilateral trade surplus with the United States is also very sizable and a matter of 

concern for Treasury. Treasury recognizes that Germany does not exercise its own 

monetary policy and that, in the absence of stronger growth elsewhere in the currency 

union, upward pressure on the nominal and real effective exchange rates may not be strong. 

Treasury also recognizes that Germany is near full employment. Nevertheless, Germany 

has a responsibility as the fourth largest global economy and as an economy with a very 
21

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

balanced trade flows. Pushing demand against inelastic supply will help push up wages, 

domestic consumption, relative prices against many other euro area members, and demand 

for imports, and will help appreciate Germany’s low real effective exchange rate. This 

would contribute to both global and euro area rebalancing. 

Switzerland

Switzerland has faced persistent pressures from safe haven inflows over the last few years 

despite the weakness of domestic economic activity and the country’s large external 

surplus. In 2016, Switzerland posted a current account surplus of 10.7 percent of GDP, 

down from 11.5 percent in 2015. The modest decrease was largely due to a small decline 

in the income balance, while Switzerland’s goods and services surpluses were very close to 

2015 levels. 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 

and is a key component of the 

trade surplus, even though the 

actual merchandise may not 

physically pass through 

Switzerland. 

The United States’ goods trade deficit with Switzerland was $13.7 billion in 2016, up from 

$9.2 billion in 2015. 

In 2016, Switzerland’s nominal effective exchange rate appreciated by 1.4 percent and its 

real effective exchange rate was roughly flat. During the same period, the Swiss currency 

depreciated 2.6 percent against the dollar and appreciated 0.7 percent against the euro. 

Switzerland continues to rely on monetary policy as its main tool to spur growth and 

inflation, with negative interest rates and intervention in the foreign exchange market to 

contain appreciation pressure on the franc. According to its December 2016 quarterly 

bulletin, the Swiss National Bank (SNB) believes the Swiss franc to be “still significantly 

overvalued.” While Swiss authorities do not publish monthly intervention data, Treasury 

estimates that SNB net purchases of foreign exchange (specifically, euros) totaled $66 

billion in 2016, with a monthly peak of $20 billion in June directly following the UK 

referendum. In its 2016 annual report, the SNB disclosed that net intervention in 2016 was 

$68 billion. 

-5

0

5

10

15

20

2009 2010 2011 2012 2013 2014 2015 2016

Percent of GDP

Switzerland: Current Account Detail 

Income Services Goods Current Account Balance

Sources: SNB; Haver
22

As a result of the persistent intervention, Switzerland’s stock of foreign reserves has grown

substantially and exceeded 96 percent of GDP at end-2016. While IMF staff concluded in 

Switzerland’s 2016 Article IV consultation that foreign exchange purchases to date have 

been warranted to address below-target inflation that is largely exchange rate driven –

particularly following the January 

2015 removal of the exchange rate 

floor – IMF staff also suggested 

that future interventions should be 

limited to managing safe haven 

inflows, and that more traditional 

monetary tools (e.g., interest rates) 

be used rather than intervention to 

manage inflation. Treasury 

supports this recommendation. 

Treasury also encourages the 

Swiss authorities to publish all 

intervention data.

Fiscal policy in Switzerland remains broadly neutral, despite the weakness of domestic 

activity – domestic demand fell by 0.2 percent in 2016 – and Switzerland’s very low 

borrowing costs. Swiss authorities point to the country’s fiscal rules as constraining the 

ability of fiscal policy to provide stimulus. However, in Treasury’s view, Switzerland 

retains ample fiscal space, with a general government budget in balance and public debt at 

46 percent of GDP. Given the estimated negative output gap, weak domestic demand, and 

overreliance on monetary policy, there is a strong case for greater use of fiscal tools to 

support output. 

0

10

20

30

40

50

60

Q3-2014Q4-2014Q1-2015Q2-2015Q3-2015Q4-2015

Q1-2016Q2-2016Q3-2016Q4-2016

Billion U.S. Dollars

Switzerland: Estimated Intervention

Sources: SNB; Haver Analytics; U.S. Treasury estimates based on sight deposits
23

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.6

Key Criteria

Pursuant to Section 701 of the Trade Facilitation and Trade Enforcement Act of 2015, this 

section 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 2016, unless otherwise 

noted) are provided in Table 1 (on p. 13) and Table 2 (below). 

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

which account for around 70 percent of U.S. trade in goods. No economy below the top 12 

trading partners individually accounts for more than 1.5 percent of U.S. goods trade. 

Treasury’s goal is to focus attention on the currency practices of 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.

 6 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, monetary policy, or inflation developments.
24

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 for the four quarters ending December 2016.7 China has the 

largest trade surplus with the United States by far, after which the size of bilateral trade 

surpluses declines very quickly. Treasury assesses that economies with a bilateral goods 

surplus of at least $20 billion (roughly 0.1 percent of U.S. GDP) have a “significant” surplus. 

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

this threshold over the most recent four quarters. 

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 are the five 

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

quarters ending December 2016. In the aggregate, these five economies accounted for 

more than half of the value of global current account surpluses in 2016. 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. 

 7 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.

Balance

(% of GDP, 

Trailing 4Q)

(2a)

3 Year Change 

in Balance

(% of GDP) 

(2b)

Balance

(USD Bil., 

Trailing 4Q)

(2c)

Net FX 

Purchases 

(% of GDP)

(3a)

Net FX 

Purchases 

(USD Bil.)

(3b)

Net FX 

Purchases 8 

of 12 Mos.?†

(3c)

China 347.0 1.8 0.2 196 -3.9 -435 No

Japan 68.9 3.8 2.9 186 0.0 0 No

Germany 64.9 8.3 1.5 286 - - No

Mexico 63.2 -2.7 -0.2 -28 -0.5 -6 No

Italy 28.5 2.8 1.8 51 - - No

Korea 27.7 7.0 0.8 99 -0.5 -7 No

India 24.3 -0.5 2.1 -11 0.4 10 No

France 15.8 -1.2 -0.3 -30 - - No

Switzerland 13.7 10.7 -0.8 71 10.0 66 Yes

Taiwan 13.3 13.4 3.4 71 1.8 10 Yes

Canada 11.2 -3.3 -0.1 -51 0.0 0 No

United Kingdom -1.1 -5.1 -1.1 -138 0.0 0 No

Memo : Euro Area 125.7 3.4 1.2 403 0.0 0 No

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

†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.

Table 2. Major Foreign Trading Partners Evaluation Criteria

Bilateral Goods 

Deficit (USD Bil., 

Trailing 4Q) 

(1)

Current Account Foreign Exchange Intervention
25

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.8 Columns 3a and 3c in Table 2 provide Treasury’s assessment of this 

criterion.9 In economies where foreign exchange interventions are not published, Treasury 

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

meets this criterion for the last four quarters available, per Treasury estimates.

Summary of Findings

Pursuant to the 2015 Act,10 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, have met two of the three criteria for enhanced analysis in this 

Report or in the October 2016 Report. Additionally, one major trading partner, China, 

constitutes a disproportionate share of the overall U.S. trade deficit. These six economies –

China, Japan, Korea, Taiwan, Germany, and Switzerland – constitute Treasury’s Monitoring 

List. Japan, Germany, and Korea met two of the three criteria in both the October 2016 

Report and this Report, having material current account surpluses combined with 

significant bilateral trade surpluses with the United States. Switzerland met two of the 

three criteria in both the October 2016 Report and this Report, having a material current 

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

exchange markets. Taiwan met two of the three criteria in the October 2016 Report –

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

intervention in foreign exchange markets – and it met one of the three criteria in this 

Report, a material current account surplus. To be removed from the Monitoring List, 

Taiwan must demonstrate a durable, not one-off, and clear improvement in the 

intervention criteria. This is particularly true in that Taiwan does not disclose intervention 

data, forcing Treasury to rely on estimates that inherently involve some degree of 

imprecision. China met only one of the three criteria in this Report, a large bilateral trade 

surplus with the United States, but this surplus accounts for a disproportionate share of the 

overall U.S. trade deficit. Treasury will closely monitor and assess the economic 

trends and foreign exchange policies of each of these economies.

 8 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. 

9 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 are not reflective of 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.

10 Section 701 of the Trade Facilitation and Trade Enforcement Act of 2015, 19 U.S.C. § 4421.
26

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

reporting period, Treasury is determined to watch very closely for any unfair currency 

practice that creates a burden for U.S. workers and U.S. companies. Though there has been 

a trend in the last two years towards reduced currency intervention by key trading 

partners, it is critical that this not represent merely an opportunistic response to shifting 

global macroeconomic conditions – in particular changes in capital flows which have 

created depreciation pressures on many emerging market currencies – but a durable policy 

shift away from foreign exchange policies that facilitate unfair competitive advantage. 

The current global configuration of external positions, in which there are pockets of 

extremely large trade and current account surpluses, is untenable. The United States 

cannot and will not bear the burden of an international trading system that unfairly 

disadvantages our exports and unfairly advantages the exports of our trading partners 

through artificially distorted exchange rates. Treasury is committed to aggressively and 

vigilantly monitoring and combatting unfair currency practices.

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. 
27

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 relative to a set of other currencies. The effective exchange rate is an index 

calculated as a weighted average of bilateral exchange rates. The weight given to each 

economy’s currency in the index typically reflects the amount of trade with that economy. 

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

maintains a fixed rate of exchange between its currency and another currency or a basket 

of currencies. Typically the exchange rate is allowed to move within a narrow 

predetermined (although not always announced) band. Pegs are maintained through a 

variety of measures including capital controls and intervention. 

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

expressed in price-adjusted terms. 

Trade Weighted Exchange Rate – see Nominal Effective Exchange Rate.