112005_report

112005_report - Report to Congress on International...

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Report to Congress on International Economic and Exchange Rate Policies November 2005 Summary This report reviews developments in international economic policy, including exchange rate policy, focusing on the first half of 2005. 1 The report is required under the Omnibus Trade and Competitiveness Act of 1988 (the “Act”). 2 Global imbalances are being manifested in large and disparate growth rates, which in turn are mirrored in divergent current account positions, particularly among larger countries. Addressing global imbalances is a shared responsibility and should occur in an orderly manner that maximizes sustained global growth. This requires: 1) further reducing budget deficits and boosting national saving in the United States; 2) appreciably strengthening domestic demand-led growth in Europe and Japan and additional structural reforms to raise economic potential; 3) greater flexibility in the exchange rates of large Asian economies that lack such flexibility, particularly China; and 4) an ambitious Doha trade round and a concerted effort to resist protectionism. This report finds that no major trading partner of the United States met the technical requirements for designation under the Act. This is consistent with the findings of this report for the past eleven years. Reaching judgments about countries’ currency practices and their relationships to the terms of the Act for the purpose of designation is inherently complex, and there is no formulaic procedure that accomplishes this objective. Moreover, the Articles of Agreement of the International Monetary Fund allow countries enormous latitude in selecting and managing exchange rate systems. In this light, a special Appendix to this Report has been added that seeks to offer greater insights into the foreign exchange practices of countries and the implications of their policies. Treasury will continue to build on this work in future reports so that we can better illuminate behavior that, while falling short of a technical designation, is distortionary and potentially problematic. 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. Since that report, the Treasury has engaged in an intensive dialogue with China and other key economies in the region to bring about needed adjustments. 1 Treasury has consulted with the IMF in preparing this report. This report focuses on the period January 1, 2005, through June 30, 2005. 2
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112005_report - Report to Congress on International...

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