(Archived Content)
JS-3024
Today, I have sent to Congress the latest report outlining the currency practices of the United States' major trading partners, as required by the Omnibus Trade and Competitiveness Act of 1988.
While attention is focused on the Report's judgments on exchange rates, exchange rate developments cannot be viewed in isolation but need to be assessed in the broader context of international economic policies and developments. Let me say briefly on that front that global economic growth remains solid and the prospects are for continued good growth next year, in particular here in the U.S. At the same time, the world economy faces challenges from high energy prices, global imbalances, protectionist pressures and the risk of higher inflation.
A manifestation of the divergent growth rates and saving and investment patterns among the major economies of the world is large and widening global current account imbalances, including the U.S. current account deficit which now exceeds 6 percent of GDP.
The adjustment of global imbalances is a shared responsibility that must be undertaken in a way that maximizes sustained global growth. America's open trade and capital markets and the corresponding flexibility and adaptability of our economy -- allow the United States to sustain sizable current account imbalances. However, it would be imprudent to test the limits of our ability to absorb these imbalances.
Employing contractionary policies to slow U.S. growth rates to match the slow growth rates of our trading partners is not the answer; it would constitute a major setback for the global economy and would also harm the efforts of many low-income countries to alleviate poverty.
The appropriate policy response involves increasing savings in the United States including the reduction of fiscal deficits, raising the growth rates of our largest trading partners, and greater exchange rate flexibility to allow for gradual, market-based adjustments.
The United States is doing its part. U.S. economic growth continues to lead the global economy, as it has for many years, while the performance of many of our largest trading partners has lagged. In addition to sustaining good growth, the United States reduced the federal budget deficit by 1 full percentage point of GDP in FY2005 to 2.6% of GDP. That level is lower than the deficit ratio of 15 of the last 25 years. This does not mean we can be satisfied. Our goal is to ensure that U.S. fiscal deficits decline further over the medium-term through restraint in non-security spending and strong economic growth leading to higher revenue receipts.
But we cannot address global imbalances alone. These imbalances will persist if growth in our major trading partners continues to substantially lag our growth rate. Domestic demand growth in Europe and Japan, though somewhat improved, still falls far short of what is needed. Substantial growth potential continues to be foregone because of weak productivity growth or constraints on labor and capital markets.
Another critical condition for addressing global adjustment prospects is greater exchange rate flexibility, especially in China and other large emerging economies of Asia, as well as the need for these economies to bolster domestic demand, including through promoting greater financial sector reform.
The 1988 Omnibus Trade and Competitiveness Act calls for reporting on 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. In submitting today's report, I would like to draw your attention to a special annex in today's report that highlights the complexity of reaching judgments on this issue. The annex, which is meant to be illustrative, shows that no one indicator or set of indicators can provide determinative evidence. These indicators require a more comprehensive analysis. To encourage greater dialogue on these issues and improve analysis, the Department is soliciting comments on the Annex.
Today's report to Congress finds that no major trading partner of the United States met the technical requirements for designation under the Act. The initial steps by China to increase exchange rate flexibility played an important part in this decision. But it is also contingent on further progress to incorporate flexibility reflecting underlying market forces in China's RMB exchange rate by the time of the next Foreign Exchange Report.
The last Report, issued on May 17, 2005, noted the importance of exchange rate flexibility in the adjustment of international imbalances. It also noted that China's fixed exchange rate created distortions and posed increasing risks to both China and the broader global economy, especially in constraining the flexibility of other Asian currencies. On July 21, 2005 China took an initial step towards greater exchange rate flexibility when it moved away from an eight-year peg, adopted a new exchange rate mechanism, and committed to a market-determined exchange rate with enhanced flexibility.
China's adoption of a new exchange rate mechanism was an important step towards exchange rate flexibility. And while China has taken additional steps to develop a market-based exchange rate and further open capital markets, its progress to date is limited and far to slow to be sufficient. The actual operation of the new system is highly constricted. As a result, the distortions and risks created by China's rigid exchange rate still persist. Furthermore, exchange rate rigidity in China continues to dampen flexibility in the entire region. It is imperative that China move towards greater flexibility as quickly as possible. In preparing the next Report the Treasury will focus on China's progress in implementing the exchange rate flexibility its leaders have committed repeatedly to introduce.
Despite adjusting its peg on July 21, Malaysia continues to maintain a rigid exchange rate. Macroeconomic conditions in Malaysia are very strongly influenced by world prices, and a stable exchange rate may be an important tool for price stability. However, a rigid exchange rate has also contributed to significant macroeconomic imbalances in the Malay economy, including large and protracted current account surpluses.
The global economy works best with free trade, open capital markets, and flexible exchange rates for large economies. Flexible exchange rates are also a key part of the adjustment of global imbalances. The United States, through bilateral and multilateral discussions, actively encourages exchange rate flexibility in large economies. The International Monetary Fund, an institution established to underpin exchange rate policy and international adjustment, must also play a central role.
In this light, the Report also calls on the International Monetary Fund to intensify its efforts to promote greater flexibility in exchange rates for China and other large emerging Asian economies and to recommend other policies, including financial sector reforms, to bolster domestic demand and reduce global imbalances. To this end, the United States also calls on the Managing Director to provide a comprehensive report on these issues, including associated policy assessments, to the Executive Board and the International Monetary and Financial Committee on an expedited basis. Treasury will also explore possible proposals for reforms in IMF exchange rate surveillance procedures.
Thank you.
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