China had its designation as a currency manipulator removed by the US just days before the two countries signed the ‘Phase One’ trade agreement.
The decision was announced in the Treasury Department’s semi-annual foreign exchange rate report. China had been designated as a currency manipulator in August last year after allowing the exchange rate of the yuan to fall to its lowest level in more than a decade, which Treasury argued was intended to “gain an unfair competitive advantage in international trade”.
The Omnibus Trade and Competitiveness Act of 1988 requires the Secretary of the Treasury to analyse the exchange rate policies of other countries. Under Section 3004 of the Act, the Secretary 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 adjustments or gaining unfair competitive advantage in international trade”.
As a result of the determination, Treasury Secretary Mnuchin engaged with the International Monetary Fund (IMF) to eliminate the unfair competitive advantage created by China, according to international trade law firm Sandler, Travis & Rosenberg (ST&R).
The Treasury now states that in the ‘Phase One’ trade agreement, which was signed on 15 January, China “has made enforceable commitments to refrain from competitive devaluation and not target its exchange rate for competitive purposes”.
The new trade agreement is a long-awaited move after almost two years of trade tensions, but brings only limited benefits for US apparel and footwear importers. Punitive tariffs still remain on 92% of the clothing shipped from China to the US. The rate might have been halved to 7.5%, yet it is applied on top of already existing tariffs that average 10.4% for woven garments and 14.4% for knitted items.