April 15, 2017

US Treasury Currency Report:
Foreign Exchange Policies of Major Trading Partners
-- The Long-term Effects of China's Currency Manipulation

Tyler Durden of ZeroHedge has posted a very useful note on the Treasury’s latest foreign currency report here. Of the passages he highlights, the following provide particularly useful guidance for those formulating a new US trade policy for the 21st century:
"[China] has a long track record of engaging in persistent, large-scale, one-way foreign exchange intervention, doing so for roughly a decade to resist renminbi (RMB) appreciation even as its trade and current account surpluses soared. China allowed the RMB to strengthen only gradually, so that the RMB’s initial deep undervaluation took an extended period to correct."  
 "... distortions in the global trading system resulting from China’s currency policy over this period imposed significant and long-lasting hardship on American workers and companies"
These "significant and long-lasting hardships" are still with us today!

Although China is not manipulating its currency today and has not done so for about two years, China -- and the United States -- allowed the RMB to remain undervalued for so long that China’s manufacturing sector was able to increase its productivity sharply while hiding behind an undervalued currency. Because of the breakdown in the global exchange rate determination system, the RMB/USD rate failed to adjust in response to this productivity increase.[1]  Hence the "significant and long-lasting hardships" that America continues to suffer.

Conclusion: Any trade policies for the 21st century that Congress and the new Administration may develop should include a mechanism such as the Market Access Charge (MAC) that will correct existing currency misalignments – even if there is no active currency manipulation going on today.
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[1]. This failure reflects the collapse of the classical link between exchange rates and balanced trade in the 1970s when exchange rates came to be set more by trade in capital assets than trade in real goods and services. (For more on this fundamental change that is central to America's trade deficits today, see  Exchange Rate Determination – The Paradigm Shift).

America Needs a Competitive Dollar - Now!

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