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.


Attacking Exchange Rate Misalignments

Strong political arguments can be made for approaches such as those recommended by Levin and by Schumer that would treat currency manipulation as an illegal subsidy and fight it with product-by-product countervailing duties. However, from an economic perspective, this approach would do little or nothing to solve the problem of large U.S. trade deficits, and relying on this approach would put U.S. factories and jobs at serious risk of increasingly unfair competition from abroad.

The only way to prevent a disaster like this is to fight all forms of exchange rate misalignment -- whether caused by currency manipulation or by other factors. I would suggest that the best way is with a mechanism such as the Market Access Charge (MAC) that I have proposed. For more details, see the May 1 post on this blog site entitled Balance U.S. Trade with a MAC Attack on Currency Misalignment. 

America Needs a Competitive Dollar - Now!