May 19, 2015

Fighting Currency Manipulation = Fighting the Last War

I would highly recommend Steven Mufson's excellent article in the May 14 issue of the Washington Post entitled "Senate passes bill targeting currency manipulators."

The article makes it very clear that focusing on the increasingly small fraction of currency misalignment represented by currency manipulation per se will do little if anything to help America's factories, workers, and trade balance. Consider the following quotes about currency manipulation:
  •  “The whole effort seems to be fighting the last war,” said David Dollar, a senior fellow at the Brookings Institution. “There is not really any case right now to say that China is manipulating its exchange rate. It has appreciated a lot over the past few years and now appears to be at fair value.”
  • “It seems like a very stale issue,” said Ed Yardeni, president of the investment advisory firm Yardeni Research. “Now to take it up when there is much less evidence of currency manipulation and as we’re seeing China’s exports flattening out kind of raises some questions about what’s the point.”
  •  Nick Lardy, a Peterson economist specializing in China, says that in 2014 China’s trade surplus dropped to 2.2 percent of gross domestic product, a level considered an indicator of fair exchange rates. At their peak in 2007, China’s exports amounted to 10 percent of GDP, he said.
  • “Since last year, we have seen . . . a very significant appreciation of the renminbi,” Markus Rodlauer, deputy director of the IMF’s Asia and Pacific department, said during the fund’s spring meetings. Given that the Chinese currency was “moderately undervalued” last year, Rodlauer said, “we are now reaching a point where we are close to it no longer being undervalued.”
These comments are fully consistent with a recent note from Fred Bergsten where he stated:
  • "When the Chinese intervention and surpluses, and the US deficits, were at record highs around 2006-08, Joe [Gagnon]’s estimates implied that manipulation was causing half or even more of our deficits.  Today, by contrast, intervention is much less and the macro-economic/monetary differences among the advanced countries are much greater.  So, the share of manipulation in the total is much smaller. 

The implication of these quotes is very clear:

To assure that the TPP and other proposed trade agreements help the average American and the American economy at large, Congress must focus on currency misalignment including misalignment of the U.S. dollar, not just on the manipulation of foreign currency values.

May 1, 2015

Balance U.S. Trade with a MAC Attack on Currency Misalignment


Responding to widespread pressures from the American public, many members of Congress are seeking to add language to the 'fast-track' or Trade Promotion Authority (TPA) legislation requiring that tough rules against currency manipulation be negotiated in the Trans-Pacific Partnership (TPP) agreement. This approach is highly unlikely to fix America's trade deficits for the following reasons:
  • The TPA bill simply repeats ineffective language similar to what has been in the IMF's rule books for years.
  • It does nothing to provide an enforcement mechanism.
  • It focuses only on currency manipulation by TPP members, totally ignoring the much bigger and more important problem of overall currency misalignment.
As promised in my previous post, an alternative policy is presented here that avoids the above problems and offers real promise of increasing the international competitiveness of America's factories and workers, stimulating growth and employment, and bringing America's imports and exports back into balance.

These highly desirable goals could be accomplished by moderating the inflow of foreign capital to levels consistent with America's need for foreign financing and with the economy's ability to use such capital efficiently. With this, Congress could prevent the overvaluation of the dollar caused by excessive foreign demand for dollars and dollar-denominated assets.

Why a New Mechanism is Needed to Balance U.S. Trade in the 21st Century