U.S. Trade Deficit:

Impact of Currency Appreciations in Taiwan, South Korea, and Hong Kong

NSIAD-89-130: Published: Apr 28, 1989. Publicly Released: May 11, 1989.

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Pursuant to a congressional request, GAO examined how: (1) Taiwan, South Korea, and Hong Kong determined their currency exchange rates; and (2) hypothetical currency appreciations in those countries could affect the U.S. trade imbalances with them and the U.S. trade deficit.

GAO found that: (1) Hong Kong freely converted its dollar with the U.S. dollar at a fixed rate, exercised the least intervention to counter market forces, and allowed its economy to adjust to trade balance changes through money supply and inflation fluctuations, rather than changing its currency value; (2) South Korea's central bank set its currency value relative to other currency on a daily basis, preventing it from freely fluctuating on foreign exchange markets and enhancing the government's ability to control exchange rate movement; (3) Taiwan's central bank intervened in the foreign exchange markets on a near daily basis, sometimes setting a daily closing exchange rate that prevented appreciation that would have otherwise occurred; (4) Taiwan, South Korea, and Hong Kong had chronic trade deficits with Japan, their primary source for intermediate and capital goods; (5) economic differences between the United States and Taiwan and South Korea have exacerbated U.S. trade deficits with those countries; (6) the combined U.S. trade deficit with the three countries was $35.4 billion in 1987 and $29.2 billion in 1988; and (7) hypothetical currency appreciations, in the absence of other structural reforms to liberalize import restrictions and strengthen domestic demand, would yield only modest reductions of the U.S. trade imbalances with South Korea and Taiwan and only minor changes in existing U.S.-Hong Kong economic and trade patterns.

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