(May 29): The Trump administration again refrained from labelling China a currency manipulator on Tuesday, a decision that leaves one of the president’s campaign promises unfulfilled but avoids further escalation in the trade war between the world’s two largest economies.

The Treasury Department issued its semi-annual foreign-exchange report to Congress, expanding the number of countries it scrutinises for currency manipulation to 21 from 12. Five countries -- Ireland, Italy, Vietnam, Singapore and Malaysia -- joined China, Japan, South Korea and Germany on a watch list for manipulation, while India and Switzerland were removed.

The report was officially due in mid-April but was delayed partly due to the changes to the criteria used to evaluate countries, a senior Treasury official told reporters Tuesday.

Designation as a currency manipulator comes with no immediate penalties but can rattle financial markets. Vietnam was at risk to be designated, Bloomberg News reported earlier this month, but avoided the label after officials visited Washington last week.

Trump Tool
Currency policy has emerged as President Donald Trump’s latest tool to rewrite global trade rules that he says have hurt American businesses and consumers. He has made foreign-exchange policy a key piece of trade deals with Mexico, Canada and South Korea, and it’s expected to be part of an agreement with China, should one be reached.

The administration last week ramped up its focus on foreign exchange, proposing tariffs on goods from countries found to have undervalued currencies. The Commerce Department’s move would let US-based companies seek anti-subsidy tariffs on products from countries found by Treasury to be engaging in competitive devaluation of their currencies. Currently no country meets that criteria.

Treasury’s currency report and the Commerce Department’s proposal are separate and follow different laws, according to a senior Treasury official.

The number of countries on the US watch list expanded after Treasury Secretary Steven Mnuchin lowered the threshold for qualification.

More Transparency
“Treasury takes seriously any potentially unfair currency practices, and Treasury is expanding the number of US trading partners it reviews to make currency practices fairer and more transparent,” he said in a statement.

The US hasn’t labeled a major trade partner a currency manipulator since 1994.

Countries with a current-account surplus equivalent to 2% of gross-domestic product are now eligible for the list, down from 3%. Other thresholds include persistent intervention in markets for a nation’s currency, and a trade surplus with the US of at least $20 billion.

Vietnam avoided the designation after its officials “credibly conveyed” that the nation’s net purchases of foreign exchange were below 2% of its GDP in 2018, putting it below the key intervention threshold, according to the report. Treasury notes that the nation tightly manages the value of the dong against the dollar.

Treasury signaled the changes in the three criteria a year ago. Expanding the list allows the department to cover more than 80% of US goods trade, allowing scrutiny of any nation that could be meaningful to the US’s macroeconomic outlook, a senior Treasury official told reporters.

As a presidential candidate in 2016, Trump often said that he would label China a currency manipulator on “day one” of his administration. So far, the Treasury’s criteria does not allow such a designation.

Countries that meet two of the three criteria are placed on the watch list. China only meets one of the criteria, but Treasury says it’s on the list because of its large trade surplus with the US.

“Treasury continues to have significant concerns about China’s currency practices, particularly in light of the misalignment and undervaluation of the RMB relative to the dollar,” the report says.

Escalating Conflict
The report comes amid an escalating conflict between the US and China over everything from trade to the wireless networks of the future. Trump this month hiked tariffs on Chinese imports, accusing Beijing of backtracking on a tentative trade deal, and cut off wireless-equipment provider Huawei Technologies Co. from its US suppliers.

China has said it wants a deal to end the trade war, but that it would reciprocate with counter-tariffs.

The fact that China wasn’t labelled a currency manipulator suggests the two nations are continuing their dialogue, said Shinsuke Kajita, chief strategist at Resona Holdings. “This doesn’t mean markets should be optimistic” about a deal, he said.