U.S. Trade Deficit: Impact of Currency Appreciations in Taiwan, South Korea, and Hong Kong

GAO discussed: (1) how Taiwan, South Korea, and Hong Kong determine their currency exchange rates; and (2) the probable impacts of hypothetical appreciations of those economies' currencies on U.S. trade imbalances. GAO found that: (1) the countries had a combined trade surplus with the United States of $29.2 billion in 1988, representing over 20 percent of the total U.S. trade deficit; (2) the factors that contributed to the trade imbalances included the low-valued Asian currencies relative to both the U.S. dollar and the Japanese yen, systematic differences between the Asian and U.S. economies, and historical trading patterns; (3) Taiwan and South Korea have acted to prevent their currencies' values from reflecting their economic strengths and have been reluctant to allow faster appreciation of their currencies in an effort to maintain current account surpluses; and (4) Hong Kong has maintained a fixed exchanged rate since 1983, allowing its economy to adjust to changes in its overall trade balance through inflationary effects. GAO also found that: (1) hypothetical 10-percent appreciations in the three countries' currencies would only yield modest results in reducing U.S. trade imbalances; and (2) further liberalization of restrictive trade barriers and macroeconomic changes increasing domestic consumption in Taiwan and South Korea, when combined with currency appreciation, would be effective in reducing U.S. trade imbalances.