In December 2020, the U.S. Treasury designated Switzerland, together with Vietnam, currency manipulators in its biannual report Macroeconomic Foreign Exchange Policies of Major Trading Partners of the United States to the congress. The report conducts an enhanced analysis on each country exceeding certain thresholds in three criteria: trade surplus with the U.S., current account surplus and foreign exchange market intervention. Based on this analysis, the Treasury can designate the country a currency manipulator. Switzerland met the three criterion during the period of the analysis of the December 2020 report, from the third quarter of 2019 to the second quarter of 2020, and the Treasury’s decision was the result of an enhanced analysis.
During the period of the analysis, Switzerland had negative interest rates and deflation; and the Swiss Franc (CHF), considered to be a safe asset in the international financial market, severely appreciated following the outbreak of COVID-19. The report acknowledged the need for foreign exchange market intervention in such a situation to counter the pressure on CHF. However, it claimed that the magnitude of the intervention was excessive; that is, at least some of it was to improve the competitiveness of Swiss products.
This study aims at evaluating the U.S. Treasury’s decision to designate Switzerland a currency manipulator, by surveying related empirical evidences. To evaluate the claim that Swiss intervention in the foreign exchange market was to improve the country’s price competitiveness, we survey the empirical evidences on the sensitivity of Swiss exports to the exchange rate of CHF. To evaluate the legitimacy of Swiss intervention in the foreign exchange market, we survey the empirical evidences on the impact of sudden exogenous appreciation of CHF on the country’s domestic economy.
Swiss export is characterized by high technological intensity and value-added. At the HS 4-digit level, for instance, exports are highly concentrated in high value-added and technology-intensive products such as medicine, medical products, chemicals and luxury watches. This concentration is known to be a result of the country’s strategic choice during the first era globalization, from the late nineteenth century to the early twentieth century. Thanks to this export structure, the CHF exchange rate has little impact on Swiss exports, especially of medicine, medical products and luxury watches, which take up more than forty percentage of the country’s total exports.
Sudden appreciation of CHF due to exogenous causes leads to a reduction in import prices, which in turn puts a downward pressure on domestically produced goods, resulting in deflation and distortion in the economic agents’ decision between imported goods and domestically produced goods in Switzerland. Intervention by the Swiss National Bank (SNB), the country’s central bank, is known to be effective in reducing exogenous appreciation pressure on CHF.
Considering the characteristics of the Swiss economy, the SNB’s intervention in the foreign exchange market appears to be for countering the effect of CHF’s sudden appreciations on the country’s domestic economy, rather than for improving the country’s price competitiveness. Deflation had been happening for some time in Switzerland, to which the SNB’s mandate of price stability urged it to react; and as it kept its policy rate negative since late 2014, reducing it further would have been ineffective and inefficient.
When the Treasury published its December 2020 report, the SNB immediately reacted by announcing its expectation that it could persuade the then-forthcoming Biden administration that its foreign exchange market intervention is solely a reaction to the exogenous appreciation pressure on CHF, not an effort to improve the country’s price competitiveness. Indeed, the April 2021 report, the first one in the Biden administration, did not designate Switzerland a currency manipulator, even though it conducted an enhanced analysis on Switzerland, as well as on Taiwan and Vietnam. This observation supports the suspicion that the conclusion of the December 2020 report was politically motivated. The Biden administration, which was about to take office at the time of the publication of the December 2020 report, was largely expected to change the Trump administration’s policies towards foreign countries, including the designation of currency manipulators. It appears plausible that the outgoing administration tried to constrain the incoming administration’s policies.
This observation suggests that the Biden administration is unlikely to designate Switzerland a currency manipulator in the future. There is a high chance that Switzerland, due to the characteristics of its economy, will again meet the three criterion for an enhanced analysis. However, the Swiss government and central bank have consistently reacted to such criticisms, and the April 2021 report’s evaluation agrees with their reactions. Therefore, the conclusions of the enhanced analyses conducted in the Biden administration are likely to be in line with that of the April 2021 report.