The US Department of Treasury has recently withdrawn India from its ‘Currency Monitoring list’ of significant trading partners, along with Italy, Mexico, Thailand, and Vietnam. The decision was made on the same day that Treasury Secretary (Just like the Finance Minister of India) Janet Yellen visited New Delhi and spoke to Finance Minister Nirmala Sitharaman.
In this article, we will discuss whether the currency Monitoring list is good or bad and the significance of India’s removal from the list.
‘US Currency Monitoring ‘ in News
▪ The United States Treasury Department has removed India from its Currency Monitoring List of major trading partners, as stated in their biannual report to Congress.
▪ Additionally, Mexico, Thailand, Italy, and Vietnam have also been removed from the list. The list includes Japan, China, Korea, Singapore, Germany, Malaysia, and Taiwan.
What is the US Currency Monitoring list?
The US Currency Monitoring List, published by the US Department of Treasury biannually (twice a year), is a report that tracks the currency practices of the United States’ major trading partners.
It’s not a “currency manipulator” designation but a watchlist for countries whose currency practices might warrant closer attention.
Who published the list?
The US Department of Treasury publishes the Currency Monitoring List twice a year as part of its report on the foreign exchange practices of major US trading partners.
Duration of US Currency Monitoring list
After a country or economy is added to the US Currency Monitoring List, it will remain on the list for at least two consecutive reports, allowing the Treasury Department to evaluate whether any performance improvements are sustainable or not caused by temporary circumstances.
Reasons for Adding a Country to the Currency Monitoring List
The US Currency Monitoring List spotlights countries with currency practices potentially creating an unfair trade advantage.
A country is added to the list if it meets two of the following criteria outlined in the Trade Facilitation and Trade Enforcement Act of 2015:
- Significant Bilateral Trade Surplus: A trade surplus with the US exceeding $15 billion (goods and services combined).
- Large Current Account Surplus: A current account surplus exceeding 3% of GDP, or a surplus deemed significant by the Treasury Department’s assessment framework.
- Persistent Intervention: Repeated purchases of foreign currency over 8 out of 12 months, totalling at least 2% of the country’s GDP.
Important Note: Meeting all three criteria might lead to a designation of “currency manipulator” by the US Treasury Department.
Countries/economies on the list
The United States has recently removed India from its currency monitoring list. However, according to reports, seven other countries are still on the list, including China, Japan, South Korea, Germany, Malaysia, Singapore, and Taiwan.
Is the Currency Monitoring List Good or Bad?
▪ The currency monitoring list is beneficial for the United States as it allows the US to monitor the currencies of its major trading partners, in case they engage in unfair currency practices to increase their exports.
▪ The report from the Treasury Department evaluated whether the exchange rate between the US dollar and the currencies of its trading partners has been manipulated to gain an unfair advantage in international trade and hinder effective adjustments to the balance of payments.
What does unfair currency practice mean?
▪ A deliberate devaluation of a country’s or an economy’s currency against the US dollar is considered an unfair currency practice.
▪ In other words, Artificially lowering the value of a country’s currency to gain an unfair advantage over other countries is considered an unfair currency practice.
▪ De-valuation will decrease the cost of imports of a country and raise the exports of the devalued country, diminishing the trade deficit.
How does it reduce a country’s import costs?
▪ For instance, let’s consider a simple example to comprehend this. Suppose country A imports apples from country B at $1 per kg.
▪ In country B, the exchange rate is 1 dollar to 80 rupees, meaning that 1 kilogram of apples costs 80 rupees in that country. If country A wants to import 50 kilograms of apples from country B, it would have to pay $50.
▪ If country B devalues its currency by 20 rupees, the exchange rate will change from 1 dollar to 100 rupees. Now, country A can buy 1.25 kg of apples for that $1.
Previous Rate: 1Kg Apple =Rs/- 80=1$ Current Rate: 1$=Rs/-100= 1Kg (Rs/- 80) + 250 gm (Rs/- 20) = 1.25 kg
▪ As a result of the devaluation of the currency, country A can now import 62.5 kilograms of apples for $50. This means that country A can now import more apples at the same cost as it was previously able to import 50 kilograms.
How does it increase a country’s exports?
▪ Let’s assume that there are five countries where the cost of 1 kilogram of apples is 80 rupees or 1 dollar and they export apples to various countries across the world.
▪ When one of these countries devalues its currency, the price of apples in that country will become lower than in the other four countries.
▪ As a result of lower import costs, more countries will be inclined to purchase apples from that specific country, thus increasing its exports automatically.
How many times has India been added to the list?
▪ India has been added to this list a total of 2 times, it was first added to the US currency monitoring list in December 2018. India was again added to the list for the second time in December 2020.
Is it good for India to be removed from the USA currency monitoring list?
▪ Yes, it’s better to be off the US currency monitoring list. Let’s look at the significance of India’s removal from the list.
▪ Currency manipulator tag: When a country is added to the United States currency monitoring list, it is considered a “currency manipulator.” India is no longer considered a currency manipulator by the US government. This designation is given to countries that, according to the US, engage in “unfair currency practices” for trade benefits.
▪ Exchange rate management: Removing the “currency manipulator” label will permit the Reserve Bank of India (RBI) to take strong measures to manage exchange rates efficiently, without facing the label of being a currency manipulator. This will aid in the appreciation of the value of the rupee.
▪ Global recognition: The revocation of India’s designation as a currency manipulator signifies the country’s increasing significance in worldwide economic expansion.
Pros and Cons of the US Currency Monitoring List
Pros:
- Promotes Fair Trade: The list encourages countries to avoid manipulating their currencies to gain an unfair advantage in international trade. This can benefit US businesses and consumers by ensuring a more level playing field.
- Increased Transparency: By highlighting countries with potentially manipulative practices, the list brings transparency to currency markets and can deter excessive intervention.
- Early Warning System: The list serves as an early warning system, prompting dialogue and potential negotiations with countries exhibiting concerning currency practices before they escalate.
Cons:
- Limited Impact: Being on the list doesn’t necessarily lead to immediate consequences. It primarily serves as a warning and may not effectively deter all countries.
- Political Tensions: The designation process and criteria can be subjective, leading to political tensions between the US and other countries on the list.
- Market Uncertainty: The list’s release can create uncertainty in currency markets, impacting exchange rates and potentially harming international trade.
Overall, the US Currency Monitoring List is a tool with both advantages and disadvantages. It can promote fairer trade practices but may have limited impact and create some market uncertainty.
Frequently Asked Questions (FAQs)
Answer: The US Department of Treasury removed India from its Currency Monitoring List along with Mexico, Thailand, Italy, and Vietnam.
Answer: India was removed from the list as they only met one of the three criteria for two consecutive reports.
Answer: 2018
Answer: Manipulation of currency such as artificially lowering the value of a country’s currency in order to gain an unfair advantage over other countries is considered an unfair currency practice.
Answer: The US Department of Treasury (Finance Department of USA)
