Any country that devalues their currency in order to take unfair advantage of the United States, which is many countries, will be met with sharply. And that includes tariffs and taxes.
Candidate Trump, Pennsylvania, 6/28/16
Messages like this resonated with voters across the nation during the Presidential Campaign. "Foreigners are manipulating their currencies" and "currency manipulation is destroying American factories and jobs" have been the rallying cries.
Currency manipulation has indeed created serious problems for the competitiveness of factories and farms across America, especially during the period 2003-2013, the "Decade of Manipulation" as Fred Bergsten and Joe Gagnon have called it in Chapter 4 of their new book, Currency Conflict and Trade Policy. But we must keep in mind two very important facts.
First, even during this period, private capital flows greatly exceeded public capital flows into the United States (Figure 1). There is no evidence that an open-market purchase of $100 billion of U.S. securities by the Chinese Government would have any more impact on the dollar's exchange rate than an equal purchase by Deutsche Bank AG of Germany. Thus, even during the "Decade of Manipulation," excessive private capital flows into the United States clearly had a larger impact on the dollar's exchange rate than did currency manipulation.
First, even during this period, private capital flows greatly exceeded public capital flows into the United States (Figure 1). There is no evidence that an open-market purchase of $100 billion of U.S. securities by the Chinese Government would have any more impact on the dollar's exchange rate than an equal purchase by Deutsche Bank AG of Germany. Thus, even during the "Decade of Manipulation," excessive private capital flows into the United States clearly had a larger impact on the dollar's exchange rate than did currency manipulation.
Figure 1
Second, the Decade of Manipulation ended about four years ago, but the US trade deficit still amounts to hundreds of billions of dollars per year because the U.S. dollar is still so sharply overvalued.
This note uses the latest data from the IMF and the Peterson Institute for International Economics (PIIE) to show (a) the severity of the dollar's overvaluation, and (b) the uniqueness of this overvaluation -- which is truly a one-of-a-kind situation for the entire world.
Among the currencies of the countries accounting for the large majority of US trade -- and almost all of its trade deficits, the dollar is the only currency that is significantly overvalued -- and it is overvalued by a massive 25.5 percent (Table 1, column 7). No wonder the US suffers serious trade deficits. [1]
Table 1
