By Kate Davidson and Josh Zumbrun
WASHINGTON -- The U.S. Treasury Department will drop its designation of China as a currency manipulator just two days before negotiators from Beijing and Washington are set to sign the first phase of the trade deal between the two countries, according to a senior U.S. official.
The trade agreement will include a section on Chinese currency practices that addresses many of the concerns raised when the U.S. applied the manipulator designation in August. As part of the agreement, China will commit to not depress its exchange rate and will make additional disclosures about its foreign-exchange practices.
The currency component has been a focus of Treasury Secretary Steven Mnuchin in talks with China, and the administration has said it was one of the trade deal's most significant parts.
U.S. lawmakers, economists and industry representatives have long accused China of undervaluing its currency to make its exports more competitive, with some saying U.S. jobs were lost as a result. Even so, the concern had faded in recent years because Beijing wasn't highly active in its currency markets. The Treasury Department refrained from branding China a manipulator until August, the first time it did so since 1994.
The designation, which came amid rising trade tensions between the world's two largest economies, had little practical impact. By law, the action triggers negotiations that could eventually lead to the imposition of tariffs. But the U.S. was already negotiating with China over trade and had already followed the legal steps to impose tariffs on all Chinese imports.
The law governing currency manipulation also directs the Treasury Department to ask the International Monetary Fund for assistance addressing currency manipulation. IMF research, however, didn't support the conclusion that China had manipulated its currency.
Fred Bergsten, who was a top Treasury official in the Carter administration, said the designation was largely symbolic and was therefore ineffective as a pressure tactic in negotiations with China.
"It was such an obvious misstatement of reality that I think it did not create any pressure," said Mr. Bergsten, who is now director of the Peterson Institute for International Economics.
A new report, in which the designation against China is formally lifted, is expected soon. The decision was reported earlier Monday by Fox Business Network.
The Treasury Department uses three criteria to assess whether a country manipulates its exchange rate: the extent of active intervention in currency markets, the size of trade surpluses with the U.S. and the size of its current-account surplus.
China's overall current-account surplus is small because, despite a large trade surplus with the U.S., it has small surpluses, or even deficits, with many other countries. And China's trade surplus with the U.S. has been dwindling as import duties damped purchases from China.
In the 12 months through December 2018, China's surplus on trade in goods with the U.S. came to about $420 billion. As of November 2019, the 12-month surplus had fallen to about $360 billion.
Write to Kate Davidson at email@example.com and Josh Zumbrun at Josh.Zumbrun@wsj.com