Singapore and Switzerland in the crosshairs?
2020 has been a difficult year for every country, and every government and central bank tried to do what they could to save themselves from a depression. In some countries, that meant resorting to manipulating the exchange rate to their advantage and at the cost of their trade partners. Small, export-oriented economies like Switzerland, South Korea, Taiwan, or Thailand all needed to ensure that their currencies didn’t appreciate too much against the US Dollar to stave off greater damage to their export industries.
This means that we now have a whole series of countries that can be classified as currency manipulators based on the five criteria defined by Bergsten and Gagnon:
They have a current account surplus in excess of 3% of GDP
They buy more than 2% of their GDP in foreign currency assets within one year
Official foreign exchange reserves and foreign assets exceed three months’ worth of imported goods and services
Official foreign exchange reserves and foreign assets exceed 100% of short-term foreign currency debt
The country is classified as a high income of upper middle income country
In total, seven countries in Europe and Asia met these criteria in 2020, with Singapore and Switzerland the biggest offenders. Singapore’s sovereign wealth funds and central bank bought a total of $139bn in foreign assets in 2020 to weaken the Singaporean Dollar while the Swiss National Bank ramped up its foreign asset purchases from $16bn in 2019 to $124bn in 2020 to weaken the Swiss Franc against the Euro and the US Dollar. Together, these two countries account for almost 60% of net foreign asset purchases by all identified currency manipulators and more than the $160bn in foreign asset purchases by currency manipulators in 2019.
It will not have gone unnoticed in Washington that these two countries are also top of the list when it comes to corporate tax dumping. At a time when Washington tries to drum up support for a global minimum corporate tax rate, being able to point out that Switzerland and Singapore are not only benefitting from low tax rates but also from potential currency manipulation give Washington additional arguments and in the extreme even the justification for tariffs and other “penalties”.
Countries that qualified as currency manipulators in 2020
Source: Gagnon and Sarsenbayev (2021)