by Al Bredenberg
Many American economists and policymakers believe that currency manipulation by U.S. trading partners such as Japan and Singapore – and especially China – creates a drag on the U.S. economy and depresses the country’s manufacturing sector.
Currency manipulation by U.S. trading partners such as Japan and Singapore – and especially China – creates a drag on the U.S. economy and depresses the country’s manufacturing sector.
Currency manipulation involves artificially reducing the value of a country’s own currency, in effect providing a subsidy for national exports. Currency manipulators often buy U.S. treasury bonds to prevent their own currencies from strengthening. In the case of China, the country’s trade with the U.S. brings in an excess of U.S. dollars and would normally create a shortage of yuans. But to avoid the yuan’s appreciation and prop up its manufacturing sector, China buys up U.S. treasuries to keep the yuan out of currency exchange markets, thus maintaining an artificially low value.
About one out of every six U.S. private-sector jobs is in manufacturing, 17.2 million in total, according to the National Association of Manufacturers(NAM). However, manufacturing dominates when it comes to U.S. trade goods, accounting for 86 percent of exports in 2011, the U.S. International Trade Commission (USITC) says. So a U.S. trade deficit, exacerbated by currency manipulation, has a disproportionately negative effect on the manufacturing sector.
Robert E. Scott, Helen Jorgensen, and Doug Hall of the Economic Policy Institute (EPI) explain that reviving the crucial U.S. manufacturing sector “requires eliminating a jobs-destroying U.S. trade deficit in goods,” in large part by ending currency manipulation. Currency manipulation, the group says, “distorts international trade flows by artificially lowering the cost of U.S. imports and raising the cost of U.S. exports,” thereby displacing American manufacturing jobs.
Eliminating currency manipulation would reduce the U.S. trade goods deficit by at least $190 billion and as much as $400 billion over three years, allowing the U.S. to “reap enormous benefits” without any increase in federal spending or taxation. This would reduce U.S. unemployment by 1 to 2.1 percentage points and create between 2.2 million and 4.7 million jobs; between 620,000 and 1.3 million of those jobs would be in manufacturing. In addition, U.S. GDP would increase between 1.4 percent and 3.1 percent.
The Group of Seven (G7) top industrial nations is concerned that continued currency manipulation is creating dangerous instability in the global economy. The organization, which is comprised of the U.S., Canada, France, Germany, Italy, Japan, and the U.K., recently saidits members are committed to market-determined exchange rates and “will remain oriented towards meeting our respective domestic objectives using domestic instruments.”
The G7 affirmed that they “will not target exchange rates” – meaning they themselves refuse to be involved in currency manipulation. “We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability,” the group declared.
Artificially lowering a country’s exchange rate can make its exports cheaper and promote growth internally, but that only causes problems for other countries because one currency can fall only if another rises. This imbalance, the EPI warns, “could spark a ‘currency war’ – a destabilizing battle where countries compete against one another to get the lowest exchange rate.” This scenario “conjures up images of the 1930s, when countries pursued tit-for-tat devaluations in order to get an edge… the outcome was to decimate global trade, accentuate the depression, and sow the seeds for World War II,” according to the institute.
Scott Paul, president of the Alliance for American Manufacturing (AAM), argued that policymakers need to act now to prevent further harm from unfair trade practices.
“Congress is obsessed with the wrong deficit,” Paul said. “To grow jobs and boost the economy, we must eliminate the trade deficit. Ending currency manipulation will get us part of the way there, but we also need a smart manufacturing policy, one that focuses on innovation, public investment, skills, and trade enforcement.”
According to the EPI report, any U.S president could end currency manipulation with a stroke of the pen: “The president could simply declare that the United States will no longer sell Treasury bills and other government assets to China and other countries that refuse to allow the United States to purchase their government assets… Refusing to sell assets to currency manipulators would eliminate the principal tool used by foreign central banks to manipulate their currencies: purchases of Treasury bills and other government securities…”
Olli Rehn, top monetary affairs official for the European Commission (EC), told the Associated Press that joint governmental efforts are needed to fight the adverse effects of “excess volatility and disorderly movements” in exchange rates. “That’s why we need to lean on active international policy coordination in order to prevent a wave of competitive devaluations.”