Currency Watch: Taiwan Under U.S. Treasury Scrutiny

Welcome to the InsightBit podcast, where we dive deep into the stories shaping the global economy. Today, we’re unpacking a critical development in international finance: the U.S. Department of the Treasury’s latest semiannual report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners, released on June 5, 2025. This report places Taiwan, alongside eight other nations—China, Germany, Singapore, South Korea, Japan, Vietnam, Switzerland, and Ireland—on a monitoring list for their currency practices. While no country was labeled a currency manipulator, the spotlight on Taiwan raises questions about global trade, exchange rate policies, and the broader economic implications for the United States and its trading partners. Let’s explore what this means, why it matters, and how it could shape economic policy moving forward.

The U.S. Treasury’s semiannual report, mandated by the Omnibus Trade and Competitiveness Act of 1988 and the Trade Facilitation and Trade Enforcement Act of 2015, evaluates the currency practices of major U.S. trading partners, which account for about 78% of U.S. foreign trade in goods and services. The report assesses three criteria to determine if a country is manipulating its currency to gain an unfair trade advantage: a bilateral trade surplus with the U.S. of at least $15 billion, a current account surplus exceeding 3% of GDP, and persistent foreign exchange intervention involving net purchases of foreign currency equivalent to at least 2% of GDP over 12 months.

In the latest report, covering the four quarters through December 2024, Taiwan, Japan, Vietnam, Germany, South Korea, Switzerland, and Ireland met the first two criteria, while Singapore was flagged for persistent foreign exchange intervention and a significant current account surplus. China, despite meeting only one criterion, remains on the list due to its lack of transparency in foreign exchange operations and its substantial trade surplus with the U.S., which reached $419 billion in 2024, according to U.S. Census Bureau data.

Taiwan’s inclusion on the monitoring list is not new—it has appeared in previous reports, including those from 2020 to 2023—but its recent actions have drawn heightened scrutiny. The report recommends that Taiwan address risks in its non-bank financial sector, particularly related to foreign exchange, and allow its exchange rate to reflect economic fundamentals. These recommendations come amid a sharp appreciation of the New Taiwan Dollar (NTD), which rose by NT$2.088 in May 2025, marking the largest monthly increase in 36 years, per Bloomberg data. This prompted Taiwan’s central bank to intervene aggressively, purchasing U.S. dollars to stabilize the NTD, pushing Taiwan’s foreign exchange reserves to a record $592.948 billion by May 31, 2025.

To understand the significance of Taiwan’s inclusion, let’s verify the economic context using reliable sources. According to the U.S. Census Bureau, Taiwan’s trade surplus with the U.S. was $48 billion in 2024, well above the Treasury’s $15 billion threshold. Taiwan’s current account surplus, as reported by the International Monetary Fund (IMF), stood at 14.8% of GDP in 2024, far exceeding the 3% criterion. However, Taiwan’s foreign exchange interventions have not consistently met the 2% of GDP threshold for manipulation, though its actions in May 2025 raised eyebrows.

Bloomberg reports confirm the NTD’s rapid appreciation, driven by strong demand for Taiwanese tech exports, particularly semiconductors, which account for 40% of Taiwan’s GDP. Taiwan Semiconductor Manufacturing Company (TSMC), a global leader, saw its stock rise 25% in 2024, reflecting robust investor confidence. The Federal Reserve’s trade-weighted U.S. dollar index, which appreciated 7% in 2024, also underscores the broader context of a strong dollar, making it less likely for countries to be flagged for deliberate currency weakening.

Historical precedent provides further context. During President Trump’s first term, China was labeled a currency manipulator in August 2019, a designation lifted in January 2020 amid trade negotiations. Vietnam and Switzerland were designated manipulators in December 2020 but cleared in subsequent reports. The absence of a manipulation label in 2025 suggests a cautious approach by the Treasury, possibly to avoid escalating trade tensions amid ongoing negotiations with Taiwan and others.

Taiwan’s inclusion on the monitoring list has multifaceted implications for the U.S. and global economies. Let’s break it down.

U.S. Trade Deficit and Manufacturing: The U.S. trade deficit, which reached $971 billion in 2024 per the Bureau of Economic Analysis, has long been a concern for policymakers. Treasury Secretary Scott Bessent emphasized that “unfair currency practices abroad have contributed to the U.S. trade deficit and hollowed out U.S. manufacturing employment.” A weaker NTD could make Taiwanese exports, like electronics and machinery, cheaper in the U.S., exacerbating the deficit. The National Association of Manufacturers reports that the U.S. manufacturing sector lost 2 million jobs between 2000 and 2015, partly due to trade imbalances. If Taiwan’s interventions persist, it could fuel calls for tariffs or other retaliatory measures.

Inflation and Consumer Prices: A strong dollar reduces import prices, helping to curb inflation, which the Consumer Price Index (CPI) pegged at 2.9% in April 2025, per the Bureau of Labor Statistics. However, if Taiwan or other monitored countries allow their currencies to appreciate, U.S. consumers could face higher prices for imported goods, such as smartphones and laptops. This could complicate the Federal Reserve’s efforts to maintain price stability, especially if it continues its current pause on rate hikes, as signaled in its June 2025 meeting.

Global Financial Markets: The Treasury’s report had minimal immediate impact on global markets, with the S&P 500 up 0.3% and the MSCI World Index flat on June 6, 2025, per Reuters. However, prolonged scrutiny of Taiwan could affect investor sentiment, particularly in Asia. Taiwan’s TAIEX index, heavily weighted toward tech, could face volatility if U.S.-Taiwan trade talks falter. Moreover, the Treasury’s broader monitoring scope, including potential surveillance of sovereign wealth funds, as noted in Reuters, could unsettle markets if applied to China or others.

Taiwan’s Economy: Taiwan’s reliance on exports makes it vulnerable to currency fluctuations. The NTD’s appreciation, while boosting purchasing power, could hurt exporters’ competitiveness. The Cato Institute argues that Taiwan’s interventions are a rational response to maintain export-driven growth, but they risk U.S. backlash. Taiwan’s GDP grew 6.5% in 2024, per the IMF, largely due to tech demand, but sustained intervention could lead to overheating or asset bubbles in its non-bank financial sector, as the Treasury warned.

The Treasury’s focus on currency practices ties into economic theories of exchange rate determination. The purchasing power parity (PPP) theory suggests exchange rates should adjust to equalize the price of goods across countries. Taiwan’s interventions, by stabilizing the NTD, may distort this equilibrium, giving its exporters an edge. The Mundell-Fleming model, which examines the interplay of exchange rates, monetary policy, and capital flows, suggests that Taiwan’s fixed exchange rate regime limits its monetary policy autonomy, potentially fueling imbalances.

Historically, currency disputes have shaped U.S. trade policy. The Plaza Accord of 1985, where the U.S. pushed Japan and Germany to appreciate their currencies, reduced the U.S. trade deficit but slowed Japan’s economy, contributing to its “Lost Decade.” The Treasury’s current approach echoes this era, with a focus on bilateral trade balances, though economists like Joseph Gagnon of the Peterson Institute argue that bilateral surpluses are less relevant in a globalized economy where supply chains span multiple countries.

Conservative Perspective: From a conservative standpoint, aligned with groups like the Heritage Foundation, the Treasury’s report is a necessary step to protect American workers and businesses. Free-market advocates argue that currency manipulation distorts competition, and Taiwan’s interventions unfairly disadvantage U.S. manufacturers. They support the Trump administration’s “America First” policy, which emphasizes tariffs and trade agreements to level the playing field. The recommendation for Japan to raise interest rates, for instance, reflects a push for market-driven exchange rates. However, conservatives caution against overreach, noting that tariffs could raise consumer prices and disrupt supply chains, as seen during the 2018-2019 U.S.-China trade war.

Progressive Perspective: Progressive voices, such as those from the Economic Policy Institute, argue that the Treasury’s focus on currency manipulation distracts from structural issues like wage stagnation and corporate tax evasion. They advocate for government intervention to address trade imbalances, such as investing in domestic manufacturing or imposing capital controls to stabilize exchange rates. Progressives also criticize the report’s lack of transparency on how it assesses “unfair” practices, suggesting it serves political rather than economic goals. They point to Taiwan’s strategic importance as a U.S. ally, arguing that punitive measures could strain diplomatic ties.

Expert and Industry Views: Economists like Brad Setser, cited in X posts, argue that Taiwan’s currency is “fundamentally undervalued,” and its interventions impede balance-of-payments adjustments. The Brookings Institution notes that while Taiwan’s actions stabilize its economy, they risk escalating trade tensions. Business leaders, particularly in tech, worry about supply chain disruptions if U.S.-Taiwan relations sour. TSMC, for instance, has invested $65 billion in U.S. factories, per company reports, signaling a commitment to bilateral ties. Consumer advocacy groups, like Consumers International, highlight the potential for higher electronics prices if the NTD appreciates further.

The Treasury’s report signals a proactive stance under the Trump administration. Potential policy responses include:

• Enhanced Engagement: The Treasury may deepen bilateral talks with Taiwan, as it did with Vietnam in 2021, leading to a July 2021 agreement to address currency concerns. Similar negotiations could yield a plan for Taiwan to reduce interventions.

• Tariffs or Sanctions: If Taiwan is labeled a manipulator in the November 2025 report, the U.S. could impose tariffs, as threatened during Trump’s first term. The Commerce Department’s 2020 Section 301 investigation into Vietnam’s currency practices offers a precedent.

• Legislative Action: Congress could amend trade laws to lower manipulation thresholds or expand the Treasury’s authority, though bipartisan support is uncertain given competing priorities like infrastructure spending.

• International Coordination: The U.S. could raise concerns at the IMF, as suggested by the Peterson Institute, though Taiwan’s non-membership complicates this approach.

Taiwan’s central bank, in a June 6, 2025, statement, denied U.S. pressure for NTD appreciation and emphasized smooth communication with the Treasury. This suggests a willingness to cooperate, but domestic pressures to protect exporters may limit concessions.

The U.S. Treasury’s decision to keep Taiwan on its currency monitoring list reflects a delicate balance between addressing trade imbalances and maintaining diplomatic ties with a key ally. While no country was labeled a manipulator, the report underscores the Trump administration’s commitment to tackling perceived unfair trade practices, with implications for U.S. manufacturing, consumer prices, and global markets. Taiwan’s record foreign exchange reserves and recent interventions highlight the challenges of managing a tech-driven economy in a strong-dollar environment.

For listeners, this story is a reminder of how interconnected our global economy is. Currency policies in Taipei can affect the price of your next smartphone or the job prospects in your community. As the Treasury prepares its next report, keep an eye on U.S.-Taiwan trade talks and consider how these decisions impact your financial future. Form your own views, stay informed, and let’s continue exploring the forces shaping our world on InsightBit.