U.S. Department of the Treasury

Report to Congress on International Economic and Exchange Rate Policies

For the Period July 1, 2000 through December 31, 2000

THIS REPORT REVIEWS DEVELOPMENTS IN

U.S. INTERNATIONAL ECONOMIC POLICY,

INCLUDING EXCHANGE RATE POLICY,

DURING THE PERIOD OF JULY 1, 2000

THROUGH DECEMBER 31, 2000. THIS

REPORT IS REQUIRED UNDER SECTION 3005

OF THE OMNIBUS TRADE AND

COMPETITIVENESS ACT OF 1988 (THE

“ACT”).

Summary

Major Findings

• The pace of U.S. economic growth slowed markedly over the period of

July 1, 2000 through December 31, 2000. While inflation and

unemployment remained low, private investment, especially in inventories,

fell off sharply.

• Global growth also slowed, leading to an export contraction in the fourth

quarter of 2000. U.S. import growth declined as well, but not as much as

exports.

• Strong capital inflows continued in the second half of 2000. The strong

capital inflows exceeded the financing needs of the U.S. current account deficit, reflecting the attractiveness of investment in the United States.

• Treasury determined that no major trading partners of the United States

manipulated exchange rates under the terms of Section 3004 of the Act

during the period under consideration. We continue to monitor the exchange rate practices of major U.S. trading partners and encourage their

taking further steps toward more flexible exchange rate regimes where appropriate.

Policy Priorities

• Pursue sound economic and financial policies in the United States. The

slowing U.S. economy reinforces the need for immediate and permanent

tax relief to undergird more vigorous economic growth.

• Encourage policies abroad that promote strong global growth. A healthy

global economy requires that economies raise productivity and perform

to their full potential.

• Pursue efforts to expand world trade, notably opening foreign markets to

U.S. exports, and support free trade that has been critical to U.S. economic success.

• Encourage closer monitoring of economic and financial developments,

and prompt policy action to prevent financial crises.

• Combat money laundering. Effective efforts are critical to the integrity

of the international monetary system.

• Continue to monitor the policies and practices of major U.S. trading

partners for evidence of currency manipulation.

EMBARGOED:

FOR RELEASE AT 4:30 P.M., EDT,

FRIDAY, JUNE 22, 2001

Table of Contents

Summary . . . . . . . . . . . . . . . . . 1

Economic and Currency

Market Developments . . . . 2-8

U.S. Economy . . . . . . . . . . . . . 9-11

U.S. Exchange Rate Policies . . 12

Exchange Rate Regimes 

Assessed . . . . . . . . . . . . . . . 13-14

Policy Priorities . . . . . . . . . . . . 15

Appendix . . . . . . . . . . . . . . . . . 16-17

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U.S. Dollar

Euro

Yen

Real Value of the Dollar, Euro, and Yen

Trade-weighted currencies, 1997-2000 (3/97=100)

Source: FRB (Broad Real Index), ECB (Broad Real 

CPI-weighted Euro), JP Morgan (Yen Broad Real)
U.S. Department of the Treasury

Report to Congress on International Economic and Exchange Rate Policies

Reporting Period: July 1, 2000 through December 31, 2000

Page 2

Economic and Currency Market

Developments in Key Economies

United States

The Federal Reserve Board staff’s broad nominal dollar index

indicated that the dollar appreciated 3.2% on a trade-weighted

basis during the period covered by this report, after a 2.9%

appreciation in the first half of 2000. The real dollar appreciated

3.0% during the second half of 2000, after a 4.0% appreciation

during the first half. Dollar movements have reflected the

record-setting U.S. expansion, continuing growth differences

between the United States and Japan, and renewed uncertainty

about emerging market economies. During the reporting period,

the Federal Reserve left its target for the Federal Funds rate

unchanged.

Euro Zone Countries

The euro depreciated further during the second half of 2000,

with a net decline of 2.6% against the dollar and 2.3% on a

nominal trade-weighted basis. At year-end, with reports of a

rapidly slowing U.S. economy, the euro rallied to $0.94 from a

low in late October just above $0.82. Rising domestic demand

and increasing oil prices offset the effect of a decline in the

trade-weighted value of the euro, and the Euro Zone’s current

account deficit stabilized at about 0.5% of GDP in the second

half.

Euro Zone economic growth in 2000 was 3.4%, the best in 10

years. In most countries, growth slowed slightly in the second

half of the year, to an aggregate 2.9% saar (seasonally adjusted

annualized rate), although some countries had surprisingly

strong fourth quarters: France, Italy, and the Netherlands grew

4.0%, 3.4%, and 3.6% (saar) respectively. The exception was

Germany’s sharp second half growth slowdown to 2.0% (0.8%

saar in the fourth quarter). The unemployment rate fell during

the period to 8.7%, the lowest level in over 8 years. Last year’s

sharp increase in oil prices maintained inflation rates above the

ECB’s 2.0% medium-term target rate during the second half of

the year. The core inflation rate (excluding food and energy

prices) remained below 2% and was 1.6% y/y at the end of 2000.

In response to concerns about inflation, (and to a lesser extent,

concerns about the exchange rate), the ECB steadily tightened

monetary conditions with two 25 basis point interest rate increases in the second half of 2000. Although monetary growth

remained above the ECB’s desired 4.5% y/y “reference rate”

throughout the year, the rate of growth had slowed to 5.1% by

December. During the second half of 2000, the spread between

the yield on U.S. and German benchmark 10-year government

bonds decreased 52 basis points. Most of the Euro Zone stock

markets followed U.S. markets down at the end of the year and

ended slightly down on the whole year (the German DAX index

was down 6.5% from end-June to end-December).

United Kingdom

In the second half of 2000, sterling appreciated on a real tradeweighted basis by 1%. The changes in sterling relative to the

UK's major trading partners were driven by the difference in

growth rates and investment climates. Sterling fell by 3%

against the dollar, but rose by 2.6% against the Euro. Sterling

had appreciated sharply in 1997, and the real trade-weighted

exchange rate in December 2000 was 17.7% above its 1996 level

(though it was lower, by 6.4%, against the dollar).

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Federal Reserve Board Staff Nominal Broad Dollar Index, 1/97=100

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Currency Movements: Euro-zone

Euros per Dollar (inverted scale)

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Currency Movements: United Kingdom

Pounds per Dollar (inverted scale)
U.S. Department of the Treasury

Report to Congress on International Economic and Exchange Rate Policies

Reporting Period: July 1, 2000 through December 31, 2000

Page 3

In the second half of 2000, the goods trade deficit was 3.2% of

GDP, up from 3% in the first half of 2000. The current account

deficit for the second half totaled $11.3 billion or 1.6% of GDP,

down from a deficit of $13.2 billion or 1.8% of GDP in the first

half. This was due to improvement of the invisibles balance.

The UK’s real GDP grew at an annualized rate of 3.0% during

the second half, above its 10-year average growth rate of 2.4%.

Parallel to global slowing, the economy slowed to 1.6% (saar) in

the 4Q/2000. Although the economy slowed, labor market conditions remained generally tight, particularly for skilled workers.

The unemployment rate, at 3.6%, reached a 25-year low.

The UK has benefited from a low inflation environment for

some time. The benchmark inflation rate (retail prices excluding

mortgage interest rates) was 2.1% for all of 2000, below the

Bank of England’s 2.5% target rate. The BOE's Monetary Policy Committee held its benchmark interest rate at 6% during the

second half of 2000.

Japan

The yen depreciated 5.4% against the dollar and was essentially

unchanged against the euro over the six-month period ending in

December 2000. The yen depreciated 6.7% against the dollar in

real terms and 3.1% in real trade-weighted terms from June to

December. Japan’s current account surplus fell from a

seasonally adjusted ¥6.9 trillion ($63 billion, or 2.7% of GDP) in

the first half of 2000 to ¥6.0 trillion ($55 billion, or 2.5% of

GDP) in the second half of 2000. Japanese investors increased

their holdings of foreign assets in the July-December period,

recording net outflows of ¥10.8 trillion ($99.3 billion), while

foreign investors increased their holdings of Japanese assets by

¥7.5 trillion ($68.9 billion). Net foreign exchange reserve

accumulation totaled ¥2.1 trillion ($19 billion) in the last six

months of 2000, vs. ¥1.9 trillion ($18 billion) in the first six

months of 2000.

Japan’s gradual economic recovery from the 1997-1998

recession began to slow in late 2000 on still-sluggish consumer

demand and weakening export markets. Industrial production

growth slowed to 2.8% q/q in the last three months of 2000,

compared to 5.3% growth in the first nine months of the year vs.

the same period of 1999. Japan needs to continue to make

progress in market-opening deregulation and other structural and

financial market reforms to raise its potential growth rate. A

shrinking labor force due to Japan’s rapidly aging population

implies that strong productivity growth will be needed if Japan is

to achieve stronger growth than the 1.2% GDP growth rate

recorded on average over the past 9 years.

Canada

During the second half of 2000, the Canadian dollar experienced

relative strength against all currencies except the U.S. dollar,

rising 2.6% against the yen and 2.7% against the euro, but falling 2.9% against the U.S. dollar. Because of the importance of

U.S. trade to Canada, the Canadian dollar fell 1.2% on a real

trade-weighted basis during the reporting period. However, Canadian terms of trade with all trading partners improved 0.5%

over the second half, partly on the strength of energy prices.

Energy and other goods exports played an important role in increasing Canada’s overall current account surplus to $6.9 billion

(2% of GDP) in the second half, up from $5.8 billion in the first

half. The goods surplus increased to 5.6% of GDP in the second

half, as net exports of energy increased 29% over the first half.

Natural gas prices doubled between June and December, while

non-energy commodity prices rose 1.8%. Goods exports to the

United States were particularly important, rising 5% during the

reporting period.

Real GDP grew 4.0% (saar) during the last six months of 2000,

slowing from the 4.7% pace set in the first half. The unemployment rate averaged 6.9%, up slightly from the 6.7% in the

first half but still around a 24-year low. Inflation remained low

and within the 1-3% target of the Bank of Canada. Consumer

prices were up 3.2% in the year to December 2000. Excluding

energy prices, the increase was 2.2%. The Bank of Canada held

its benchmark policy rate, the Bank Rate, steady during the second half of 2000. Long-term government bond rates fell slightly

toward the end of the year.

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Currency Movements: Japan

Yen per Dollar (inverted scale)

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Currency Movements: Canada

Canadian Dollars per Dollar (inverted scale)
U.S. Department of the Treasury

Report to Congress on International Economic and Exchange Rate Policies

Reporting Period: July 1, 2000 through December 31, 2000

Page 4

Overview of Emerging Market Finances

Credit and liquidity spreads in emerging financial markets rose

considerably in the second half of 2000, on renewed concerns

about the sustainability of the rapid growth experienced in the

first half of 2000. The yield spread over U.S. Treasuries of JP

Morgan’s Emerging Market Bond Index+ (EMBI+), after

remaining largely unchanged in the first half, widened by 52

basis points in the second half of 2000. This increase was due,

in part, to the increasing spreads of Argentine debt, which

increased sharply between October and November of 2000. At

one point, Argentina EMBI+ spreads increased to 987 bps, but

spreads declined throughout December with the successful

conclusion of an IMF package. In contrast, spreads on Mexico’s

EMBI+ index widened only 6 bps in the second half of 2000.

Additional weakness manifested itself in the declines in most

emerging market stock indices in the second half. The South

Korean stock market index experienced a continual decline in

value between end-2Q/2000 and end-4Q/2000 (falling to just

under half of 1999 levels). In Latin America, losses were

concentrated in the fourth quarter; Brazilian and Mexican

markets continued to gain value throughout 3Q/2000, but then

retreated sharply.

Another indication of tightening conditions was the dramatic

reduction in bond offerings in 4Q/2000. Only $9 billion in

new bonds were issued, less than one-quarter the volume of the

first quarter of 2000. For the year as a whole, bond issuance

remained essentially flat (over 1999 levels).

However, the emerging market economies made progress in

reducing their vulnerability to external shocks in 2000. Shortterm debt declined to $469 billion in 2000, down slightly from

1999 levels. Meanwhile, reserves continued to increase, and the

ratio of reserves to short-term debt climbed to nearly 200% by

2Q/2000 (latest available data). As the accompanying graph

(“Emerging Markets Reserves to Short-Term Debt”) indicates,

however, this increase was concentrated in the East Asian

emerging markets and not matched elsewhere. Indeed, the ratio

of reserves to short-term debt decreased in Sub-Saharan Africa

and the Middle East although in the former case, the ratio

remained above 100%. Eastern European and Central Asian

emerging markets managed to increase the ratio slightly (from

140% in 1999 to 150% in 2000). Latin American economies

experienced a decline in the ratio to 85%.

0%

60%

120%

180%

240%

300%

360%

1990 1992 1994 1996 1998 2000

East Asia Latin America

EE and C. Asia Middle East

Sub-Sahara

Emerging Markets Reserves to Short-Term Debt

By region (usable reserves as a percent of S-T debt, inc. trade credit)

0

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400

600

800

1,000

1,200

1/00 3/00 5/00 7/00 9/00 11/00

EMBI+ Argentina

Mexico

Tale of Two EMBI+ Spreads, 2000

Basis point spreads over U.S. bonds (Source: Bloomberg)

Financial Market Developments in Emerging Markets

(issuances in bil. of U.S. dollars, and percent increases in an index)

1999 2000 1Q/00 2Q/00 3Q/00 4Q/00

Issuances 163.7 216.9 60.3 55.4 52.2 48.8 

Bonds 82.4 82.0 33.8 16.1 23.0 9.0 

Equities 23.2 41.7 8.9 11.6 8.8 12.3 

Loans 58.1 93.2 17.6 27.7 20.4 27.5 

Returns (EOP; % inc. over prev. year)

EMBI+ 26% 16% 29% 23% 28% 16% 

Argentina 13% 8% 15% 15% 12% 8% 

Brazil 41% 13% 31% 25% 29% 13% 

Mexico 15% 18% 18% 20% 25% 18% 

Poland 1% 16% 4% 8% 11% 16% 

Russia 166% 55% 248% 97% 146% 55% 

Stock Markets

Brazil 152% -11% 67% 44% 43% -11% 

Mexico 80% -21% 52% 19% 25% -21% 

Shanghai-A 19% 51% 55% 14% 21% 51% 

S. Korea 83% -51% 39% -7% -27% -51% 

Source: IMF Em. Mkt. Financing (Q. Rep. on Developments & Prospects)

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1990 1992 1994 1996 1998 2000

0%

50%

100%

150%

200%

Reserves

Short-term Debt

Reserves to STD (right axis)

Source: IMF, World Bank, OECD, BIS External Debt Tables

Reserves to Short-Term Debt, 1990-2000

For developing and emerging markets (bil.U.S. $ and % of S-T debt)
U.S. Department of the Treasury

Report to Congress on International Economic and Exchange Rate Policies

Reporting Period: July 1, 2000 through December 31, 2000

Page 5

Latin America: Overview of Selected Countries

Year-on-year growth accelerated for the Latin American region

during the reporting period. For 2000, regional growth was

about 4%, vs. no growth in 1999. Argentina was the notable

exception. Its economy contracted 0.5% in 2000. At the other

end of the spectrum, Mexico experienced 7% GDP growth. External bond spreads, as measured by the Latin America EMBI+

index, widened 27 basis points in the second half of the year and

109 basis points for the year. Nonetheless, the larger Latin sovereigns issued $12 billion in new bonds in the second half of

2000, after placing $21 billion in the first half of the year.

Argentina. The Argentine economy contracted over 1% y/y in

the second half of 2000 after disappointing first half growth and

a 3.4% contraction in 1999. Weak aggregate demand continued

to feed a deflationary environment, with the CPI falling 0.5%

during the second half. The resignation of Vice President

Alvarez in early October and poor fiscal results for the first nine

months sparked market concern that Argentina was facing an

imminent economic and financial crisis. Argentina’s access to

international bond markets closed, and it had difficulty rolling

over its domestic debt. The spread on Argentina’s component of

the EMBI+ index widened 300 bps between June 30 and

November 8 to 987 bps over U.S. Treasuries, though it narrowed

to 773 bps by end-December following agreement with the IMF

on a $39.7 billion IMF-led support package. Despite stagnation

and 9.7% improvement in the terms-of-trade for the year, the

2000 current account deficit totaled 3.3% of GDP, only

marginally lower than the 3.5% current account deficit in 1999.

Brazil. In the second half of 2000, the Brazilian economy

continued to rebound from its weak performance in 1999. Real

GDP growth reached 5.1% y/y and 4.4% y/y in the 3rd and 4th

quarters of 2000, and was 4.2% for the full year. At the same

time, CPI inflation slowed to just under 6.0% in December, vs.

6.5% in June – below the Central Bank’s (BCB) 2000 inflation

target of 6%. In addition, Brazil met or exceeded the key targets

under its three-year $18 billion IMF program. During 2H/2000,

the BCB lowered its target overnight interest rate 175 bps (375

bps for the year) to 15.75%, bringing the real interest rate below

10%. After relative stability in 1H/2000, the Brazilian real

depreciated 7.4% against the dollar in 2H/2000 amid limited

progress on structural reforms and higher borrowing costs due to

external uncertainties. For the year, Brazil’s EMBI+ spread over

Treasuries widened 113 basis points to 749 at end-December.

The current account deficit rose to $13.4 billion in 2H/2000, vs.

$11.2 billion in 1H/2000 and $12.8 billion 2H/1999, but for the

full year narrowed slightly to $24.6 billion (4.2% of GDP) from

$25.1 billion (4.7% of GDP) in 1999. Net FDI inflows financed

134% of the 2000 current account deficit ($18.1 billion in FDI in

2H/2000 alone).

Colombia. Colombia’s economy outperformed expectations in

2000. GDP grew 2.8%, vs. a contraction of 4.3% in 1999, and

inflation was 8.7%, well under the 10% inflation target.

Likewise, the 2000 fiscal deficit narrowed to 3.4% of GDP, from

5.5% in 1999 and under the IMF target of 3.6%. On the external

front, strong export demand led to a current account surplus of

$178 million in 2H/2000, vs. a deficit of $82 million in 2H/1999.

Nonetheless, Colombia’s EMBI+ spread widened to 755 basis

points on December 31, 2000, from 722 basis points on June 30,

2000, reflecting investor concerns over the internal security

situation and, to a lesser degree, discord between the Pastrana

government and the Congress.

Ecuador. Ecuador has made considerable progress since the

exchange rate crisis and debt default in 1999. It implemented a

number of fiscal and structural reform measures throughout

2000, completing dollarization in September, normalizing

relations with most Brady/Euro bondholders via a bond

exchange in August, and completing negotiations to reschedule

Paris Club arrears in September. These actions, along with

higher-than-expected oil prices, allowed Ecuador to post a 1.3%

of GDP fiscal surplus in 2000, compared with a 7.0% of GDP

deficit in 1999. Though CPI inflation was 91% during 2000, it

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Brazil

Colombia

Mexico

Venezuela

Currency Movements: Latin America

Domestic Units per Dollar (inverted scale and rebased to 1/99=100)

Mexico Brazil Venezuela Argentina

3Q/99 4.4% 0.5% -4.3% -5.1% 

4Q/99 5.4% 3.4% -4.1% -0.5% 

1Q/00 7.7% 3.8% 1.1% 0.5% 

2Q/00 7.6% 3.5% 2.7% 0.2% 

3Q/00 7.3% 5.1% 3.4% 0.0% 

4Q/00 5.1% 4.4% 5.6% n.a.

Source: Haver Database

Real GDP Growth: Selected Latin American Countries 

Percent change from one year ago

1/00 6/00 12/00

Change 

6/00-12/00 

Brazil (Reais/$) 1.81 1.80 1.95 8.1% 

Mexico (Pesos/$) 9.63 9.84 9.61 -2.4% 

Venezuela (Bolivares/ 655.51 682.00 699.75 2.6% 

Ecuador (Sucres/$) 24,975 25,000 25,000 0.0% 

Colombia (Pesos/$) 1,977.50 2,155.50 2,236.00 3.7% 

Currency Values: Selected Latin American Countries 

Domestic currency units per Dollar (end-of-month levels, 2000)
U.S. Department of the Treasury

Report to Congress on International Economic and Exchange Rate Policies

Reporting Period: July 1, 2000 through December 31, 2000

Page 6

slowed in 2H/2000 and is generally expected to be 25-30% in

2001. Reserves above those legally required to back central

bank liabilities, ended 2000 at $770 million, well above the

IMF’s target. Despite these positive developments, political

divisions stalled many of Ecuador’s promised bank and fiscal

reforms (including tax reform), leading to delays in scheduled

bimonthly reviews of its one-year $305m IMF program.

Mexico. Mexico’s economic momentum dissipated slightly in

the second half as GDP growth tapered to 6.2% y/y from 7.7%

y/y in the first half. Despite the rapid expansion, inflation

continued its downward trajectory. Inflation for 2000 was 8.9%

y/y, below end-June’s 9.4% y/y pace and the central bank’s

inflation target of 10%. A strong peso helped. The peso

appreciated 3.4% in the second half of 2000 to 9.62/dollar on

December 31, but depreciated 1.2% for the full year.

Rapid growth caused some deterioration in the current account,

which widened to $18 billion (3.1% of GDP) in 2000 from $14

billion (2.9% of GDP) in 1999. Nonetheless, capital inflows

boosted net international reserves by $6 billion in the second

half of the year to $35.6 billion on December 31 and enabled

Mexico to repay early all its outstanding loans from the IMF.

Emerging Asia

Growth in Emerging Asia (outside of China) reached 6.9% in

2000, up from 6.5% in 1999. All the major economies in the

region posted positive growth, ranging from 3.9% in the Philippines to 9.9% in Singapore. During the first three quarters of the

year, Asian economies continued to benefit from strong global

demand, especially for electronics and telecommunications

equipment. Intra-regional trade also continued to expand at a

rapid pace. A resurgence in import demand resulted in a decline

in current account surpluses for all major economies during 2000

with the exception of Indonesia, Singapore, and Taiwan. The

slowdown in growth in the United States and Europe, and Japan’s faltering recovery, led to a sharp slowdown in export

growth during the fourth quarter. The export falloff was most

pronounced in high technology goods, with Singapore, Korea

and Malaysia the most affected countries.

With the exception of China, Hong Kong, and Malaysia, most of

the large economies in the region maintained managed floating

exchange rate regimes. Central bank reserve accumulation was

much more moderate during 2000, compared to 1999 when most

central banks intervened in the foreign exchange markets to

build up their reserves in the wake of the Asian financial crisis.

During 2H/2000 foreign exchange reserves actually declined for

Malaysia, Taiwan and the Philippines as export growth slowed

and capital markets became increasingly concerned over the

disappointing progress made in addressing structural constraints

on growth as well as growing political turmoil in the Philippines.

Indonesia. Indonesia’s economy finally began to rebound,

growing nearly 5% in 2000 compared to zero in 1999. However,

this was from a low post-crisis base; Indonesia has yet to

experience the robust recovery of other Asian crisis countries.

Factors supporting growth included high oil prices and relatively

strong demand from Indonesia’s largest trading partners.

Investor confidence remained weak due to political uncertainty

and enduring concerns about the government’s willingness and

capacity to follow through with its IMF-supported economic

program. Concerns about the possibility of new fiscal and

banking crises also put downward pressure on the rupiah and

upward pressure on short-term interest rates.

Indonesia maintains a floating exchange rate regime. The

central bank intervened sporadically, and was able to rebuild

reserves, particularly during periods of high oil prices. During

the second half of 2000, net international reserves increased

from $16.2 billion to $17.8 billion, equivalent to about 50% of

total short-term external debt on a residual maturity basis.

Nevertheless, the rupiah depreciated 1.2% in real effective terms

(and 8.2% against the dollar in nominal terms) over the reporting

period. The weak rupiah continued to support Indonesian

exports, which grew 27% in 2000. Growth of non-oil exports

was slower at 17% in 2000. The U.S. bilateral trade deficit with

Indonesia grew from $3.5 billion in 1H/2000 to $4.3 billion in

2H/2000. 

Philippines. The Philippines’ real GDP growth in 2000 was the

lowest in Emerging Asia at 3.9%. Fiscal overruns, slow

progress on structural reforms, and a political crisis undermined

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Indonesia

Philippines

Thailand

Currency Movements: Selected ASEAN Countries

Domestic Currency Units per Dollar (inverted scale, 1/99=100)

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Currency Movements: NIEs (ex. Hong Kong)

Domestic Currency Units per Dollar (inverted scale, 1/99=100)
U.S. Department of the Treasury

Report to Congress on International Economic and Exchange Rate Policies

Reporting Period: July 1, 2000 through December 31, 2000

Page 7

investor confidence late in the year, triggering intense downward

pressure on the peso. The current account surplus increased to

an estimated 10% of GNP in 2000 (from 9% in 1999), despite

slowing export growth, as import growth declined even more

sharply. The bilateral trade surplus with the United States in

2000 was $6.0 billion compared to $5.2 billion in 1999.

The Philippines maintains a managed floating exchange rate

regime. During the height of the political crisis, the Philippine

monetary authorities intervened intermittently and raised interest

rates by a total of 400 basis points to support the peso and stem

inflationary pressures. Nevertheless, the peso fell 14% against

the dollar and 11% on a real effective basis during the reporting

period. Gross international reserves fluctuated over the period

but ended roughly unchanged at $15 billion for the year, or

110% of short-term debt (on a residual maturity basis). As a

percent of M2, gross reserves rose to 51% at end-2000 from

44% at end-1999.

Thailand. Thailand’s economic recovery continued in 2000,

with GDP growing 4.2%, supported mainly by accommodative

fiscal policies and strong growth in export-oriented industries.

Monetary policy, in the absence of inflationary pressure, was

also broadly accommodative and supportive of the conomic

recovery. During the second half of 2000, the current account

surplus remained largely unchanged from the first half at 7% of

GDP. Thailand’s bilateral trade surplus with the United States

was $9.7 billion in 2000. Thailand maintains a floating

exchange rate regime. Thailand experienced a steady outflow of

private capital during the year due to amortization payments to

foreign banks and growing market concerns over the

disappointing progress made in addressing structural problems in

the banking and corporate sectors. During the reporting period,

the Thai baht depreciated 10% against dollar and 5% in real

effective terms. Net international reserves were largely

unchanged, rising by $556 million to $29 billion, equivalent to

209% of short-term external debt on a residual maturity basis.

As a percent of M2, reserves rose from 28% to 30%.

Singapore. Singapore’s GDP growth rebounded strongly in

2000 to 9.9% and was largely export led, especially in electronics and chemicals. The current account surplus in 2000 was

$21.8 billion (22% of GDP), unchanged from 1999. Singapore’s

bilateral trade surplus with the United States grew from $1.3

billion in the first half of 2000 to $2.4 billion in the second half.

Official foreign reserves increased by $3 billion to $80 billion in

2000, primarily as a result of interest earnings. As a percent of

M2, reserves grew from 74% at end-1999 to 82% at end-2000.

Given the importance of imports in household consumption,

Singapore’s monetary policy is heavily influenced by

movements in its exchange rate. Given the strong growth during

the second half of 2000, the Monetary Authority of Singapore

adopted a “tightening” stance, by targeting a slight appreciation

in the Singapore dollar on a nominal trade-weighted basis. The

Singapore dollar was broadly stable against the U.S. dollar and

there was a slight appreciation on a real, trade-weighted basis.

Developments in other Economies

Nigeria. Nigeria reached agreement with the IMF on a one-year

$1 billion precautionary Standby Arrangement in August 2000,

clearing the way for a Paris Club rescheduling of $23 billion of

Nigeria’s external debt (of which $21 billion were arrears) in

December 2000. This resumption of relations with the

international community as well as the continued increase in oil

prices – which averaged $29.8 per barrel in 2H/2000 compared

to $27.1 per barrel in 1H/2000 – further boosted prospects for an

overdue economic recovery in Nigeria. However, so far

expectations have failed to translate into broad-based GDP

growth (2.8% in 2000 compared to 1% in 1999), and

performance under the IMF program was poor. Excessive fiscal

spending (roughly 45% of GDP) destabilized macroeconomic

fundamentals, with year-on-year inflation and reserve money

growth reaching 14.5% and 40%, respectively, in December

2000.

The government attempted to rein in the excess liquidity through

open market operations, but they were under-subscribed and thus

only moderately successful. The government responded to increased pressure in the foreign exchange market with greaterthan-envisioned sales of foreign exchange reserves and enforcement of existing capital controls. (Note: foreign exchange reserves nonetheless increased in 2000 by $4 billion to $9.4 billion

or 6.7 months of imports). In 2H/2000, restrictions on foreign

exchange trading segmented the recently liberalized interbank

market into “official” and “open” markets, with a 10% gap

emerging between them. In December 2000, the Government

merged the two markets (resulting in an 8% depreciation of the

official rate) by restoring the transferability of funds. However,

the premium between this interbank rate and the tolerated parallel market rate continued, widening from 5% in 1H/2000 to 13%

at end-2000. Performance on broader structural issues, such as

privatization, is essential to the continuation of the IMF program

but progress to date has been slow.

Poland. Poland’s economy slowed in the second half of the

2000, as the effects of the authorities’ tight monetary stance

worked their way through the system. In August 2000, the

90

100

110

120

130

1/99 7/99 1/00 7/00

Nigeria

Poland

Russia

South Africa

Currency Movements in Other Emerging Markets

Domestic Currency Units per Dollar (inverted scale; 1/99=100)
U.S. Department of the Treasury

Report to Congress on International Economic and Exchange Rate Policies

Reporting Period: July 1, 2000 through December 31, 2000

Page 8

Monetary Policy Council increased its benchmark rates by 150

bps, completing a rate-hiking cycle that pushed borrowing costs

up by 600 bps in less than a year. Real GDP grew 3.3% in

3Q/2000 and 2.4% in 4Q/2000, compared to 5.2% for the first

half of the year, and the unemployment rate rose to 15%, up

from 13.8% in July. At the same time, inflation fell from a twoyear high of 11.6% y/y in July to 8.5% y/y in December. The

current account deficit also improved, falling from 7.4% of GDP

in July to approximately 6.2% in December.

The zloty/USD and zloty/euro rates experienced wide swings

during the reporting period. The zloty depreciated from 4.30

zloty per USD on July 1st to 4.71 in mid-October, before appreciating roughly 12% to 4.13 by the end of the year. Against the

euro, the zloty appreciated from 4.09 at the beginning of July to

3.86 by the end of 2000 – an appreciation of approximately 6%.

The zloty’s strength in the fourth quarter of 2000 reflected high

real interest rates and positive investor sentiment in light of improvements in the inflation and current account picture.

South Africa. Real GDP in South Africa grew a stronger-thanexpected 3.5% in the second half of 2000 (after 2.4% in the first

half) primarily because of sharp increases in private investment

and exports. Real GDP is expected to grow 3.8% in 2001. The

South African Reserve Bank’s (SARB) targeted inflation

measure fell to 6.9% in the second half (from 8.8% in the first

half) in the wake of a slower money supply growth and subdued

increases in labor costs. The rate of inflation is generally

expected to fall to 6.5% in 2001. Despite the falling rate of

inflation, the SARB did not loosen monetary policy because the

rand depreciated significantly against the dollar. As a result of

higher-than-expected revenues, the budget deficit for

FY1999/2000 of 2.4% of GDP was lower than expected. The

budget deficit is projected to rise slightly to 2.5% of GDP in

2002.

The rand depreciated a further 12% against the dollar in the second half of 2000 after depreciating 10% against the dollar in the

first half. South Africa’s terms of trade remained stable in the

second half of 2000 after rising 0.5% in the first half. A surge in

exports, led by the depreciating rand, caused the current account

balance to improve from -0.5% of GDP for the first half of 2000

to -0.2% of GDP in the second half. A large increase in portfolio investment and FDI in the third quarter caused the balance on

the financial account to narrow from -1.5% of GDP in the first

half of 2000 to -0.6% in the second half. However, because

capital flows were still negative, the SARB had difficulty accumulating foreign exchange reserves. The SARB reduced its net

open forward position (NOFP) from $10.1 billion in June 2000

to $9.5 billion in December 2000, and net reserves remained at

$4.9 billion.

Turkey. Turkey’s GNP grew rapidly in 2000 at 5.9% y/y (after

contracting 6.1% in 1999), reflecting a recovery from

earthquakes in 1999 and the positive effects of Turkey's

disinflation and economic reform program. The Turkish government launched the program in December 1999, supported by

a 3-year $3.9 billion Stand-By Arrangement (SBA) agreed with

the International Monetary Fund. The program was founded on:

fiscal adjustment; a tight monetary policy; and structural reform,

especially banking sector reform and privatization. A central

feature of the program was a "crawling peg" mechanism for the

exchange rate, with the pegged exchange rate depreciating in

line with targeted inflation so it served as an anchor for disinflation. The crawling peg was scheduled to shift gradually to an

expanding band later in mid-2001, before moving to a flexible

exchange rate in 2003.

Results were positive, if not entirely on target, for most of the

reporting period. Growth was strong, reaching 6.6% in the second half of 2000. All fiscal targets were met or exceeded.

Inflation dropped sharply, especially in the second half.

Consumer price inflation was 39% y/y in December 2000, down

from 57% in June 2000 and 69% in December 1999, but still

above the target of 25%.

However, circumstances changed by late November 2000. A

number of factors – delays in structural reform (especially for

the banking sector and privatization), higher interest rates (rising

from a low of 31% for T-bills in April to 87% in early December), a growing current account deficit (reaching 5% of GNP in

2000), and serious weaknesses in the banking sector (including a

serious maturity mismatch and large open foreign exchange position) – prompted a financial crisis and liquidity crunch in late

November and early December, 2000. The Central Bank responded by injecting liquidity beyond the agreed levels in the

IMF program. A medium-sized bank failed, and heavy foreign

exchange outflows of $7.5 billion over two weeks threatened the

foreign exchange peg. In reaction, the government and IMF

agreed to strengthened economic policies, and a $7.5 billion

Supplemental Reserve Facility was approved December 21,

2000. These actions stabilized financial markets, although residual effects could be seen in the banking sector and market

confidence, including in the exchange rate peg, and the economy

remained fragile.
U.S. Department of the Treasury

Report to Congress on International Economic and Exchange Rate Policies

Reporting Period: July 1, 2000 through December 31, 2000

Page 9

U.S. Economy

Overview of the U.S. Economy

The U.S. economy downshifted to a lower growth rate in the

second half of 2000. Even with this slower rate of growth, the

United States is enjoying the longest period of uninterrupted

growth in its history. After growing 5.2% in the first half of

2000, growth slowed to 1.6% in the second half. Reduced business investment in equipment and software, and an inventory correction accounted for much of the decline. The lower equipment

and software investment mostly reflected a reduction in aircraft

and truck production. A downturn in motor vehicle production

accounted for 0.8 percentage point reduction in real GDP growth

in 4Q. By the end of the year, factory output was falling. However, U.S. nonfarm productivity growth remained robust, growing

2.2% in 4Q/2000, slower than the 1995 to 2000 average of 2.8%,

but still higher than the 1973 to 1995 average of 1.3%.

The U.S. unemployment rate reached a low of 3.9% in September

and October but ended the year slightly higher, at 4%. The CPI

inflation rate reached 3.4% y/y in December, down from 3.7% in

June, largely due to easing oil prices. The “core” rate of inflation

(excluding food and energy) was essentially unchanged (2.5% in

June; 2.6% in December). The interest rate on the benchmark 10-

year U.S. Treasury note, after peaking in January at 6.7%, declined throughout 2000 to 5.2% in December. Gross national

saving as a share of GDP declined 0.5 percentage point in the second half to 18% of GDP (compared to end-1H/2000).

IMF Article IV Consultation

The conduct of economic policy by the U.S. Administration

and the Federal Reserve was highly commended by the IMF

staff at the conclusion of the IMF staff’s 2000 consultation

with the United States on July 12, 2000 (in accordance with

Article IV of the IMF’s Articles of Agreement). The IMF staff

said that “[s]ound monetary and fiscal policies have contributed to

making the current U.S. economic expansion the longest on record.” The IMF staff also notes the importance of the U.S. expansion to the global economy. “The strength of the U.S. economic

expansion played a critical role in supporting world economic

growth during the period of turbulence in 1997-98.”

However, the IMF staff also took the view that the growth in U.S.

domestic demand in excess of supply and the perceived attractiveness of the investment environment have been reflected in a large

and growing current account deficit. In the view of the IMF staff,

appropriate policies in major U.S. trading partners to promote sustained expansion of their economies as well as U.S. policies aimed

at sustaining noninflationary growth are necessary to produce a

smooth rebalancing of global demand. Consistent with a broad effort by the United States to enhance the transparency of the IMF, the

United States is part of a pilot project established by the IMF's Executive Board to allow countries to release to the public the staff

reports on their Article IV reviews. The staff report on the U.S.

economy was released on July 28, 2000 on the IMF’s web site.

0%

2%

4%

6%

8%

10%

1Q/97 3Q/97 1Q/98 3Q/98 1Q/99 3Q/99 1Q/00 3Q/00

U.S. Real Gross Domestic Product. 1997-2000

% change over previous quarter, SAAR

Source: Bureau of Economic Analysis (BEA)

2%

3%

4%

5%

6%

1/98 7/98 1/99 7/99 1/00 7/00

0%

1%

2%

3%

4%

Unemployment (left axis)

Inflation

Core Inflation (ex. food and energy)

U.S. Civilan Unemployment Rate and Inflation Rate

Unemployment (left axis); Inflation (y/y % change in prices, right axis)

Source: Bureau of Labor Statistics

4%

5%

6%

7%

8%

1/98 7/98 1/99 7/99 1/00 7/00

U.S. Interest Rates

% (10 year Treasury, constant maturity)

Source: U.S. Treasury

-1%

0%

1%

2%

3%

4%

5%

6%

1Q/97 3Q/97 1Q/98 3Q/98 1Q/99 3Q/99 1Q/00 3Q/00

16%

17%

18%

19%

20%

21%

Personal

Government

National (right axis)

U.S. National Saving and Selected Components 

% of GDP (personal/gov't on left axis; national on right axis)

Source: BEA
U.S. Department of the Treasury

Report to Congress on International Economic and Exchange Rate Policies

Reporting Period: July 1, 2000 through December 31, 2000

Page 10

Trade Flows

The downshift in U.S. growth helped to moderate U.S.

import consumption in the second half of 2000. However,

a combination of slowing global growth that reduced U.S.

exports and continued high energy prices led to an increase in both the trade and current account deficits. In

the fourth quarter of 2000, U.S. imports fell for the first time

in five years, and U.S. exports declined sharply after six

quarters of strong growth.

During 2000, the current account deficit rose every quarter to

new, record levels, from $421 billion (saar) in the second quarter

of 2000 to $461 billion (saar) in the fourth quarter of 2000 (at

4.6% of GDP). Over the same period, the goods and services

deficit increased from $355 billion (saar) to $397 billion (saar).

U.S. exports of goods and services increased 11.2% in the second

half of 2000 over the same period in 1999. However, goods

exports declined sharply, resulting in a 5.6% decline in fourth

quarter exports (annualized). An important component of the

U.S. current account includes the growing “trade in invisibles”

(services exports and imports, and income receipts and outflow

payments). Invisibles exports (services plus income receipts)

reached an all-time high in 2000, finishing the year at 83% (or

nearly equaling) merchandise exports. Invisibles imports (services

plus outflow payments for foreign employees and past foreign

investments) are still less than half of merchandise imports (46%

in the fourth quarter of 2000).

The rising current account deficit tends to lead to a larger

negative U.S. net international investment position (NIIP).

While the 2000 NIIP data will not be available until June 2001,

outflow payments have increased sharply since 1993 (when the

level of net foreign indebtedness was approximately one-quarter

the -$1.1 trillion position at current cost in 1999). Outflow

payments were $353 billion (saar) in 4Q/2000. Despite an

appreciated dollar, which tends to reduce foreign income receipts,

this category has also increased sharply and is now greater than

services exports. Income receipts (at $356 billion, saar) nearly

equaled outflow payments in 4Q/2000, resulting in no significant

net effect on the current account balance.

-500

-400

-300

-200

-100

0

1Q/98 3Q/98 1Q/99 3Q/99 1Q/00 3Q/00

Current Account Balance

Goods and Services Balance

U.S. External Balances

Billions of U.S. $, SAAR (Balance of Payments, BOP, Basis)

Source: Bureau of Economic Analysis, Bureau of the Census

800

900

1000

1100

1200

1300

1400

1500

1600

1Q/98 3Q/98 1Q/99 3Q/99 1Q/00 3Q/00

Imports

Exports

U.S. Trade in Goods and Services

Billion of U.S. $, SAAR (BOP Basis, trade balances in bold)

Source: Bureau of Economic Analysis, Bureau of the Census

-166

-181 -253

-305

-355

-397

U.S. Bilateral Merchandise Trade Balances

Billions of U.S. $ (nsa, Census basis) South

China Japan Canada Mexico America EU

1Q/99 -13.6 -16.3 -6.8 -5.7 1.1 -5.6 

2Q/99 -15.7 -17.2 -6.8 -6.5 -0.3 -10.6 

3Q/99 -20.1 -19.4 -9.4 -6.3 -2.5 -13.8 

4Q/99 -19.3 -20.4 -9.4 -4.2 -1.7 -13.3 

1Q/00 -16.7 -19.1 -10.8 -5.7 -4.1 -13.1 

2Q/00 -19.4 -20.6 -11.5 -6.2 -3.4 -13.4 

3Q/00 -25.0 -20.4 -13.3 -6.7 -3.6 -14.9 

4Q/00 -22.7 -21.2 -14.8 -6.3 -3.0 -14.2 

Source: Bureau of Economic Analysis, Bureau of the Census 

Quarterly non-seaonsally adjusted (nsa) data can be volatile.

0%

10%

20%

30%

40%

50%

60%

1Q/80 1Q/82 1Q/84 1Q/86 1Q/88 1Q/90 1Q/92 1Q/94 1Q/96 1Q/98 1Q/00

Services Exports Income

Services Imports Outflow

U.S. Trade in Services and Income Receipts, 1980-2000

Services and income (outgo), as a share of merchandise exports (imports)

U.S. Trade in Goods and Services

Billions of U.S. $ (BOP basis, SAAR)

Level Change Level Change

1Q/99 921.3 -9.3% 1,132.0 2.3%

2Q/99 937.2 7.1% 1,190.4 22.3%

3Q/99 967.9 13.8% 1,258.7 25.0%

4Q/99 998.6 13.3% 1,303.7 15.1%

1Q/00 1,023.8 10.5% 1,364.8 20.1%

2Q/00 1,063.7 16.5% 1,418.7 16.8%

3Q/00 1,101.7 15.1% 1,484.2 19.8%

4Q/00 1,085.8 -5.6% 1,482.8 -0.4%

Source: Bureau of the Census

 Exports Imports 
U.S. Department of the Treasury

Report to Congress on International Economic and Exchange Rate Policies

Reporting Period: July 1, 2000 through December 31, 2000

Page 11

U.S. Financial Flows

Billions of U.S. $, s.a., details might not equal totals due to rounding Q1/99 Q2/99 Q3/99 Q4/99 Q1/00 Q2/00 Q3/00 Q4/00 1999 2000

Net Financial Flows................................................... 77 100 70 64 58 151 102 88 312 400 

Net Portfolio Flows................................................... 77 -6 45 74 117 23 73 63 190 276 

U.S. acquisition of foreign assets*.............................. -13 -97 -69 -42 -80 -75 -51 -75 -221 -281 

Foreign acquisition of U.S. assets.............................. 90 91 114 116 196 98 124 138 411 556 

Foreign Official............................................. 4 -1 12 27 22 6 12 -4 43 36 

Private**...................................................... 86 92 102 88 174 92 112 142 368 521 

Net Banking Flows................................................... 15 -5 13 -26 -64 65 -7 -24 -2 -31 

Assets............................................................... 28 -42 -11 -45 -56 18 -6 -67 -70 -110 

Liabilties............................................................ -14 37 25 20 -9 47 -1 43 67 79 

Net Direct Investment................................................ -14 111 12 16 6 63 37 49 125 155 

U.S. direct investment abroad.................................... -41 -33 -44 -33 -43 -37 -36 -45 -151 -162 

Foreign direct investment in the United States............... 27 144 56 49 49 100 73 94 276 317 

Source: Bureau of Economic Analysis

* Net private claims on foreigners by nonbanks plus net private U.S. purchases of foreign securities.

**Net purchases of U.S. Treasury securities, net nonbank liabilities to foreigners, net purchases of gov't non-Treasury securities, and net U.S. 

currency flows.

Financial Flows

Financial inflows continued to increase during the period

covered by this report, reflecting the attractiveness of the

United States as a destination for business investment.

Capital inflows help maintain lower interest rates than would

likely be possible otherwise. Funds generated by investments

made at suitable rates of return can be used to service any debt

that is created through the trade deficit. However, increased

capital flows and trade deficits increase the potential vulnerability of the United States to changes in global financial markets’

perceptions of investment opportunities in the United States.

The annual return on foreign direct investment has helped support past flows. As the table (“Annual Return on FDI, 1993-

1999”) indicates, there is significant variation in the return on

foreign direct investment by country.

In the fourth quarter of 2000, outflow payments (at $353

billion saar) on foreign investments were sizable, nearly one

quarter (24%) of the total imports of goods and services.

While part of the current account balance, outflows represent

payments on past, accumulated current account deficits.

There is also significant variation in the dependence of other

nations on income flows from the United States. For Canada,

income flows have declined in importance since 1993, and are

now only 4% of Canadian receipts on exports of goods and

services to the United States. On the other hand, for six of the

twelve Euro Zone countries, U.S. outflow payments have risen

from 15% of their exports to the United States in 1993 to 26% in

the fourth quarter of 2000.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1Q/93 1Q/94 1Q/95 1Q/96 1Q/97 1Q/98 1Q/99 1Q/00

World Euro-zone (6)

Canada Eastern Europe

Latin America Japan

U.S. Outflow Payments as a Share of Imports, 1993-2000

By economy, as % of imports of goods and services from that economy

Source: BEA; Euro (6): Germany, France, Italy, BelNeLux

Annual Return on FDI, 1993-1999

1993 1994 1995 1996 1997 1998 1999 1993-99

World 1.5% 4.3% 5.8% 5.1% 5.9% 4.1% 5.2% 4.5% 

Canada 3.4% 7.0% 8.0% 5.8% 4.4% 2.1% 1.9% 4.6% 

Euro-zone 1.5% 4.5% 5.7% 5.9% 6.2% 4.9% 5.7% 4.9% 

U.K. 5.7% 7.3% 9.1% 8.5% 8.3% 4.8% 6.7% 7.2% 

LA* 7.4% 5.2% 7.3% 7.6% 10.0% 12.6% 9.9% 8.5% 

Mexico 4.3% -1.6% 1.2% 0.1% 6.1% 10.1% 7.2% 3.8% 

Mid.East -3.2% 0.9% 2.4% 2.0% 8.7% 5.8% 2.3% 2.7% 

Japan -2.1% 0.8% 3.4% 2.5% 4.4% 3.8% 4.0% 2.4% 

NIE-3 1.2% 2.9% 4.7% 3.3% 2.9% -1.1% 0.5% 2.1% 

Note: *LA=Latin America, excluding Mexico. NIE-3= Hong 

Kong, Singapore, Taiwan. Korea had several years of poor 

returns and negative recorded inflows (i.e., outflows) of FDI.

ROA measured by the ratio of FDI income to stock of FDI at historical 

cost (per year) in current U.S. Dollars
U.S. Department of the Treasury

Report to Congress on International Economic and Exchange Rate Policies

Reporting Period: July 1, 2000 through December 31, 2000

Page 12

U.S. Exchange Rate Policies

During the reporting period, July 1 through December 31, 2000,

the dollar traded in a range of ¥104.22 to ¥114.39. The period

was characterized by downward pressure on the euro. Toward

the end of October, the euro reached a record low of $0.8225. In

December, the euro rebounded to end the year just above $0.94.

There were two episodes of exchange rate intervention to

support the euro. The first, in September, was a coordinated

effort among the G-7 monetary authorities. The second episode

was a unilateral effort by the European Central Bank (ECB)

undertaken in early November.

G-7 Statements on Exchange Rate Policies

In September 2000, G-7 Finance Ministers and Central Bank

Governors issued the following statement.

• “We discussed developments in our exchange and

financial markets. We have a shared interest in a strong

and stable international monetary system. At the

initiative of the European Central Bank, the monetary

authorities of the United States, Japan, United Kingdom

and Canada joined with the European Central Bank on

Friday, September 22, in concerted intervention in

exchange markets, because of the shared concern of

Finance Ministers and Governors about the potential

implications of recent movements in the euro for the

world economy. In light of recent developments, we

will continue to monitor developments closely and to

cooperate in exchange markets as appropriate.”
U.S. Department of the Treasury

Report to Congress on International Economic and Exchange Rate Policies

Reporting Period: July 1, 2000 through December 31, 2000

Page 13

Exchange Rate Regimes Assessed

Elements of Manipulation

Section 3004 of the Omnibus Trade and Competitiveness Act of

1988 requires the Treasury to analyze annually the exchange rate

policies of foreign countries, in consultation with the IMF, and

to consider whether countries manipulate the rate of exchange

between their currency and the dollar for purposes of preventing

effective balance of payments adjustments or gaining unfair

competitive advantage in international trade. The Secretary of

the Treasury is required to undertake negotiations with those

manipulating countries that have material global current account

surpluses and significant bilateral trade surpluses with the

United States, unless there would be a serious detrimental impact on vital national economic and security interests.

• Treasury undertook a broad review of the performance of major trading partners of the United Stated

and concluded that no major trading partners of the

United States manipulated exchange rates under the

terms of Section 3004 of the Act during the period

under consideration.

• Treasury officials have urged the Malaysian and

Chinese authorities to move, over time, to more flexible exchange rate regimes.

In evaluating evidence of currency manipulation, Treasury looks

at the following five factors:

• External Balances. Persistent global current account

surpluses are fundamentally a reflection of an excess of

national savings over national investment, but in some

cases may also reflect efforts to maintain an exchange

rate level that would prevent external adjustment.

• Exchange Restrictions and Capital Controls. Restrictive exchange regimes and capital controls can be a concern, particularly where the restrictions are designed to

maintain a consistently undervalued exchange rate.

• Exchange Rate Movements. Large depreciations of

exchange rates, if induced artificially rather than by

market forces responding to fundamentals, could suggest an attempt to gain a competitive advantage in

trade. Manipulation could also be reflected in the absence of a significant appreciation of the exchange rate

when justified by fundamentals. Equilibrium real exchange rates, however, are determined by a number of

factors and are therefore difficult to define.

• Changes in International Reserves. Significant and

persistent accumulation of foreign exchange reserves

could be a source of concern if it reflects efforts to

maintain an excessively competitive exchange rate.

• Macroeconomic Trends. When analyzing these

economies, Treasury looks at the macroeconomic policy stance and other conditions that are important determinants of exchange rates.

Assessment

As the law requires, economies were examined as potential exchange rate manipulators if they had significant global current

account surpluses and bilateral surpluses with the United States

and maintained a fixed or actively managed exchange rate system during the reporting period. Detailed assessments are not

provided for those economies where oil exports, with prices

customarily denominated in dollars, clearly dominate total exports, and fluctuations in world oil prices produce at times wide

swings in the trade and current account balances.

Five emerging market economies were reviewed in detail: Taiwan, China, Korea, Russia, and Malaysia.

Taiwan. Taiwan’s economy expanded by 6% in 2000.

However, a noticeable deceleration in growth occurred in the

second half of the year with both private consumption and

investment contracting. Disputes between the ruling and

opposition parties, uncertainty over the government’s economic

policies, tight credit conditions due to the weakness in its

domestic financial sector and rising unemployment weighed

heavily on investor and consumer confidence. The slowdown in

global demand for Taiwan’s predominantly high-technology

exports, which began in the last quarter of 2000, is expected to

contribute to a further weakening of aggregate growth going

forward. The current account surplus widened in the 2H/2000 to

4.6% of GDP up from 1.6% of GDP in the first half. Over the

same period, Taiwan’s bilateral trade surplus with the U.S.

increased to $8.6 billion, up from $7.6 billion.

Taiwan maintains a heavily managed exchange rate policy.

Nevertheless, the New Taiwan Dollar depreciated 7% against the

dollar and and 3% on a real effective basis over the reporting

period as the authorities allowed the currency to move largely in

line with market forces. Taiwan's monetary authorities exert a

strong influence on the foreign exchange market through heavy

and frequent intervention, the use of various capital controls and

close monitoring of trading. Over the second half of 2000, net

foreign exchange reserves decreased by $7.1 billion to $107

billion as the authorities leaned against a weakening of the

Taiwanese dollar. As a percentage of M2, reserves declined to

18.7% from 19.3%. U.S. Treasury officials have urged the

authorities to reduce their role in the foreign exchange market,

and allow market forces and participants greater freedom to

engage in private foreign exchange transactions.
U.S. Department of the Treasury

Report to Congress on International Economic and Exchange Rate Policies

Reporting Period: July 1, 2000 through December 31, 2000

Page 14

China. China’s real GDP growth was relatively unchanged at

about 7.8% y/y in 2H/2000 compared to 8.2% y/y in 1H/2000, as

recovery in domestic demand (fueled by fiscal and monetary

stimulus) offset slowing global demand and the impact of a

weakening yen and other Asian currencies on China’s external

competitiveness. As a result, China’s current account surplus

declined slightly to an estimated 1.5% of GDP in 2000 (official

statistics, available only on an annual basis, had not been

released at the time this report was prepared) compared to 1.6%

in 1999. China’s merchandise trade surplus measured $12

billion in 2H/2000, similar to 1H/2000 but only about half of the

$21 billion trade surplus in 2H/1999, as export growth continued

to be outpaced by even stronger import growth. China’s

bilateral trade surplus with the United States rose to $47 billion

in 2H/2000, from $36 billion in 1H/2000 and $39 billion in

2H/1999 due to robust U.S. demand and the competitiveness of

Chinese products relative to other low cost producers.

China implements a de facto currency peg to the dollar, which it

has maintained unchanged within a tight band since 1995.

During the Asia crisis, at a time when many Asian currencies

depreciated sharply, China maintained the renminbi peg against

the U.S. dollar. The real effective exchange rate of the RMB

appreciated about 5% between July and October 2000, as Asian

currencies depreciated against the dollar. Gross foreign

exchange reserves reached $166 billion by end-2000, about 10

times short-term external debt on a residual maturity basis,

virtually unchanged from end-1999. Reserves as a percent of

M2 declined slightly to just over 10% at end-2000, from 11% at

end-1999. Reserve growth during 2H/2000 can be accounted for

largely by estimated interest earnings. China also continues to

maintain wide-ranging controls on capital account transactions.

In bilateral discussions, U.S. Treasury officials have urged China

to move, over time, to a more flexible exchange rate regime to

give monetary policy greater scope to address domestic

economic conditions.

Korea. Korea’s real GDP grew 8.8% in 2000. However, real

GDP fell during the fourth quarter compared to the third (on a

seasonally adjusted basis) due to weakening exports, particularly

in the electronics sector. This, along with a recovery in domestic

demand, led to a significant decline in Korea’s current account

surplus during 2000 to the equivalent of 21⁄2% of GDP compared

to 6% in 1999. However, Korea’s bilateral trade surplus with

the United States rose to $7.8 billion in the second half of 2000,

compared to $5 billion during the same period in 1999. The

increase reflected a surge in electronics goods exports during the

third quarter of 2000.

Korea maintains a managed floating exchange rate regime. Net

foreign exchange reserves rose by about $12 billion in the

reporting period to $96 billion. At the end of 2000, reserves

stood at 218% of short-term external liabilities compared to

189% in 1999. As a percent of M2, reserves were modestly

higher at 281⁄2% compared to 261⁄2% at end-June and 251⁄2% at

end-1999. During the reporting period, the won depreciated

13% against the dollar and 4% on a real effective basis. In

bilateral discussions, Treasury officials continued to stress to

Korean officials the importance of allowing market forces to

determine the exchange rate.

Russia. Russia’s GDP rose 7.6% in the second half of 2000

compared to the second half of 1999 and 3.4% compared to the

first half of 2000, reflecting robust industrial output growth and

a recovery in domestic demand. Federal revenue collections

slipped slightly in the second half, falling to 16% of GDP from

17% of GDP in the first half, and caused the primary surplus to

fall to 4% of GDP from 6% of GDP. The current account

surplus remained steady at 18% of GDP in the second half,

primarily due to stable energy prices and rising non-energy

exports. Imports recovered strongly in the second half of 2000,

rising 17% compared to the second half of 1999, reflecting

increases in household income and some real appreciation of the

ruble during 2000. Russia’s bilateral trade surplus with the

United States reached $5 billion in 2000.

Russia operates a managed floating exchange rate. The ruble

was under strong pressure to appreciate in the second half of

2000, but the Central Bank of Russia intervened to keep the

ruble around 27.7-28.0 R/$. The ruble appreciated 7% (in real

terms) in the 2H/2000 due to Russian inflation. By intervening,

the CBR took advantage of Russia’s favorable balance-ofpayments position to rebuild reserves from their low levels

following the 1998 financial crisis. The favorable balance-ofpayments position also enabled the Russian government to pay

its external debt. In 2000, Russia’s foreign exchange reserves

more than doubled from $12.5 billion to $28 billion, while the

ratio of Russia’s reserves to short-term debt increased from

128% to 321%. Accumulation of reserves fueled growth of base

money, which increased 60% in 2000, while inflation was 20%.

Malaysia. Malaysia’s real GDP grew 8.5% in 2000, largely on

strong export performance. However, the economy slowed

appreciably in the fourth quarter, in line with slowing external

demand. A surge in government spending in the fourth quarter

prevented a more dramatic deceleration. The current account

surplus for 2000 is estimated to have declined to 10% of GDP

compared to 16% in 1999. Nevertheless, the bilateral surplus

with the United States increased from $9 billion to $11 billion on

strong U.S. demand for electronics goods.

Malaysia has maintained a fixed peg to the dollar since September 1998, when it also imposed capital controls. Malaysia has

since relaxed these controls, largely limited as of end-2000 to a

capital gains tax on investments held less than a year, restrictions

on foreign investment by residents, and a prohibition on offshore

trading in the ringgit. As regional currencies depreciated over

the period, the ringgit appreciated 4.8% on a real trade-weighted

basis. Despite a sizable current account surplus, capital outflows

led to a $4 billion decrease in net international reserves in

2H/2000 to $30 billion. As a percent of M2, reserves fell from

35% at end-1999 to 32% at end-2000. Nevertheless, reserves as

a percent of short-term debt rose to 374% at end-2000, up from

355% at end-1999. In bilateral discussions, U.S. Treasury

officials continued to urge Malaysian authorities to move, over

time, to a more flexible exchange rate regime.
U.S. Department of the Treasury

Report to Congress on International Economic and Exchange Rate Policies

Reporting Period: July 1, 2000 through December 31, 2000

Page 15

Policy Priorities

• Pursue sound economic and financial policies in the

United States. Economic fundamentals – productivity

growth, the flexibility of labor and capital markets, and

low inflation – remain strong.

• In particular, the slowing U.S. economy reinforces

the need for immediate and permanent tax relief to

undergird more vigorous economic growth.

• Encourage policies abroad that promote strong

global growth. A healthy global economy requires that

economies raise productivity and perform to their full

potential.

• In particular, encourage Japan and Europe to undertake appropriate macroeconomic policies and intensify structural reforms necessary for strong and

balanced global growth. Encourage developing

countries to cultivate a good policy environment and

work to raise productivity, which is the ultimate driver

of higher incomes per capita and reduced poverty.

• Pursue efforts to expand world trade, notably

opening foreign markets to U.S. exports, and support free trade that has been critical to U.S. economic success.

• Encourage closer monitoring of economic and financial developments, and prompt policy action to prevent financial crises.

• Combat money laundering. Effective efforts are critical to the integrity of the international monetary system.

• Continue monitoring major U.S. trading partners

for evidence of currency manipulation as countries

balance the goals of reserve accumulation to cover

foreign liabilities and appropriate exchange rate adjustment. In economies with a significant amount of

debt denominated in foreign currencies, or where the

currency is fixed to another currency, a sufficient level

of foreign reserves is important. However, in the context of a floating exchange rate regime, a country can

accumulate an excessive level of reserves in an attempt

to prevent a currency appreciation. This appreciation

can serve an important element in the adjustment of

both trade and financial flows. Excessive intervention

can, in the long run, build pressures in an economy.
U.S. Department of the Treasury

Report to Congress on International Economic and Exchange Rate Policies

Reporting Period: July 1, 2000 through December 31, 2000

Page 16

Appendix

OMNIBUS TRADE AND COMPETITIVENESS

ACT OF 1988 (H.R. 3)

SEC. 3004. INTERNATIONAL NEGOTIATIONS ON

EXCHANGE RATE AND ECONOMIC POLICIES.

(a) Multilateral Negotiations.-The President shall seek to confer

and negotiate with other countries-

(1) to achieve-

(A) better coordination of macroeconomic policies of

the major industrialized nations; and

(B) more appropriate and sustainable levels of trade

and current account balances, and exchange rates

of the dollar and other currencies consistent with

such balances; and

(2) to develop a program for improving existing mechanisms for coordination and improving the functioning

of the exchange rate system to provide for long-term

exchange rate stability consistent with more appropriate

and sustainable current account balances.

(b) Bilateral Negotiations.-The Secretary of the Treasury shall

analyze on an annual basis the exchange rate policies of foreign

countries, in consultation with the International Monetary Fund,

and consider whether countries manipulate the rate of exchange

between their currency and the United States dollar for purposes

of preventing effective balance of payments adjustments or

gaining unfair competitive advantage in international trade. If

the Secretary considers that such manipulation is occurring with

respect to countries that (1) have material global current account

surpluses; and (2) have significant bilateral trade surpluses with

the United States, the Secretary of the Treasury shall take action

to initiate negotiations with such foreign countries on an expedited basis, in the International Monetary Fund or bilaterally, for

the purpose of ensuring that such countries regularly and

promptly adjust the rate of exchange between their currencies

and the United States dollar to permit effective balance of payments adjustments and to eliminate the unfair advantage. The

Secretary shall not be required to initiate negotiations in cases

where such negotiations would have a serious detrimental impact on vital national economic and security interests; in such

cases, the Secretary shall inform the chairman and the ranking

minority member of the Committee on Banking, Housing, and

Urban Affairs of the Senate and of the Committee on Banking,

Finance and Urban Affairs of Representatives of his determination.

SEC.3005. REPORTING REQUIREMENTS.

(a) Reports Required.-In furtherance of the purpose of this title,

the Secretary, after consultation with the Chairman of the Board,

shall submit to the Committee on Banking, Finance and Urban

Affairs of the House of Representatives and the Committee on

Banking, Housing, and Urban Affairs of the Senate, on or before October 15 each year, a written report on international economic policy, including exchange rate policy. The Secretary

shall provide a written update of developments six months after

the initial report. In addition, the Secretary shall appear, if requested, before both committees to provide testimony on these

reports.

(b) Contents of Report.-Each report submitted under subsection

(a) shall contain-

(1) an analysis of currency market developments and the

relationship between the United States dollar and the

currencies of our major trade competitors;

(2) an evaluation of the factors in the United States and

other economies that underline conditions in the currency markets, including developments in bilateral

trade and capital flows;

(3) a description of currency intervention or other actions

undertaken to adjust the actual exchange rate of the

dollar;

(4) an assessment of the impact of the exchange rate of the

United States dollar on

(A) the ability of the United States to maintain a more

appropriate and sustainable balance in its current

account and merchandise trade account;

(B) production, employment, and noninflationary

growth in the United States;

(C) the international competitive performance of

United States industries and the external indebtedness of the United States;

(5) recommendations for any changes necessary in United

States economic policy to attain a more appropriate

and sustainable balance in the current account;
U.S. Department of the Treasury

Report to Congress on International Economic and Exchange Rate Policies

Reporting Period: July 1, 2000 through December 31, 2000

Page 17

(6) the results of negotiations conducted pursuant to section

3004;

(7) key issues in United States policies arising from the

most recent consultation requested by the International

Monetary Fund under article IV of the Fund’s Articles

of Agreement; and

(8) a report on the size and composition of international

capital flows, and the factors contributing to such flows,

including, where possible, an assessment of the impact

of such flows on exchange rates and trade flows.

(c) Report by Board of Governors.-Section 2A(1) of the Federal

Reserve Act (12 U.S.C. 225a(1)) is amended by inserting after

“the Nation” the following:”, including an analysis of the impact

of the exchange rate of the dollar on those trends”.

SEC. 3006. DEFINITIONS.

As used in this subtitle:

(1) Secretary.-The term “Secretary” means the Secretary of the

Treasury.

(2) Board.-The term “Board” means the Board of Governors of

the Federal Reserve System.