China and Germany are not manipulating the value of their currencies to gain an unfair trade advantage, but both should do more to reduce their large trade surpluses with the United States, the Treasury Department said Friday.
The decision was expected after President Donald Trump this week reversed himself and said China was not a currency manipulator.
And although the administration's first report to Congress on the foreign exchange policies of US trading partners continues the stance of the Obama administration, putting six countries with troublesome policies on a watch list, it takes a much tougher tone.
Unlike the previous administration, which issued its final report in October, the latest semi-annual report urges specific policy actions the countries should pursue that would lead to a lower trade surplus.
Trump repeatedly pledged in his election campaign to name China as a currency manipulator on his first day in office -- prompting fears of a trade war -- but did not do so. He publicly retreated from that position after meeting with Chinese President Xi Jinping in Florida last weekend.
China met only one of the three criteria required to be labeled a currency manipulator -- a large trade surplus with the United States -- while Germany also met a second: a current account surplus amounting to more than three percent of the nation's economic output.
Beijing has not intervened recently in markets to weaken the value of its currency -- the third criteria -- and in fact has tried to keep the renminbi from falling further amid the country's relatively sluggish growth rate.
Germany, as part of the eurozone, cannot act unilaterally to change the value of the euro.
A weaker currency makes exports cheaper compared with those of competitors. Declaring a country a manipulator would set off a process including negotiations that could culminate in punitive trade sanctions on the offender.
Treasury Secretary Steven Mnuchin said ensuring a level playing field for US businesses is an "essential component of this administration's strategy."
"Expanding trade in a way that is freer and fairer for all Americans requires that other economies avoid unfair currency practices, and we will continue to monitor this carefully," he said in statement.
Japan, South Korea, Taiwan and Switzerland also were again included on Treasury's monitoring list.
- China must open economy -
Even though China has not moved to keep its currency weak in the past three years, the country "has a long track record of engaging in persistent, large-scale, one-way foreign exchange intervention, doing so for roughly a decade," the Treasury Department said.
That "distortion in the global trading system... imposed significant and long-lasting hardship on American workers and companies."
With a trade surplus in goods with the United States of $347 billion last year, and continued policies that restrict free trade and foreign investment, "Treasury will be scrutinizing China's trade and currency practices very closely."
The large goods surplus "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."
Beijing also will need to prove that the recent stance of not trying to weaken the currency is "a durable policy shift," even if the renminbi begins to appreciate again.
- Germany should spend more -
The Treasury Department said Germany should take steps, notably spending policies, "to encourage stronger domestic demand growth," something the country's trading partners and the International Monetary Fund have been urging for some time.
Increased demand "would place upward pressure on the euro... and help reduce its large external imbalances," increasing domestic consumption, including of imported goods.
Those imbalances include its $65 billion goods trade surplus with the United States last year, and what the department calls "the world’s largest current account surplus at close to $300 billion."
The report also called on Japan to do more "to revive domestic demand and combat low inflation while avoiding a return to export-led growth."
This would include more "flexible" government spending policies, and continued reforms to boost the labor market and increase productivity of the Japanese economy.