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Why We Need A Currency War With China (And Denmark And Singapore … )

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Reposted from The Washington Post (Blog)

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Why We Need A Currency War With China (And Denmark And Singapore … )

Dylan Matthews | January 3, 2013 | Washington Post blog

Every now and again, policymakers express interest in cracking down on foreigners — particularly the Chinese government — who buy up stocks and bonds in the United States to keep their own currencies cheap and their exports high. Senator Chuck Schumer (D-N.Y.) sponsored legislation, which passed the Senate, authorizing tariffs against currency manipulators such as China.

Just a month ago, Schumer attacked the Obama Treasury Department for not formally designating China a currency manipulator, a demerit which Mitt Romney promised to bestow during his presidential run.

In a new working paper, Joe Gagnon and Fred Bergsten at the Peterson Institute argue not just for import tariffs like those Schumer advocates, but for a full-frontal assault on countries that are manipulating their currencies, including many more targets than just China, which is actually getting better relative to past manipulation. Specifically, they want the U.S. to offer the eight worst currency manipulators — China, Denmark, Hong Kong, Korea, Malaysia, Singapore, Switzerland and Taiwan — an ultimatum: Stop manipulating, or else we’ll do the following:

1. Buy up exactly as many assets in their currencies as they have in ours. If Denmark has $78 billion in dollar-denominated assets, as it did at the end of 2011, then we’ll buy up 396 billion Danish kroner (the equivalent of $78 billion) worth of Danish assets to balance that out. That’s a lot of Lego kits.

2. For countries where we can’t do that, perhaps because there aren’t enough Legos to buy, tax the earnings from dollar-denominated assets as punishment. If a Treasury bond is paying out $10 twice a year to a Danish bondholder, then the tax would force a portion of that, perhaps a big portion, to go back to the U.S. government.

3. Treat currency manipulation the same way we treat export subsidies for the purposes of imposing retaliatory tariffs. This is where Gagnon and Bergsten make common cause with Schumer. If Denmark is doing $78 billion of currency manipulation, then we’d be entitled to impose $78 billion in tariffs on Danish goods, just as we would if they were spending $78 billion on, I don’t know, Lego subsidies.

4. Take the manipulators to the World Trade Organization (WTO), which could authorize even further punishments.

The hope is that these measures would stop currency manipulation, make the dollar less expensive, and thus promote U.S. exports. The effects, Gagnon and Bergsten argue, would be significant. Eliminating currency manipulation, they estimate, would reduce the value of the dollar by 10 to 25 percent. Taking the low-end figure, a 10 percent depreciation would, in the short run, boost GDP by 1.5 percent and create 2 million jobs. And it will stop a trend that’s gotten fairly out of control in recent years:

But the risk is that Gagnon and Bergsten’s policies would only provoke the targeted countries, leading them to respond with still more manipulation and/or tariffs on U.S. goods, setting off a full-fledged currency and trade war that just leaves all parties worse off. Gagnon and Bergsten argue that this is unlikely, but even in the absence of a full-fledged war, the plan would likely sour U.S. relationship with important regional actors like Malaysia, Korea and China, which could lead to less than salutatory outcomes in other domains. But for a 1.5 percent boost in growth, it just might be worth it.

 

12 Responses to “Why We Need A Currency War With China (And Denmark And Singapore … )”

  1. Dr. Bob Goldschmidt says:

    What is needed is a value-added wage-equalization tariff that whose proceeds are paid to the workers adding the value. Countries would then compete on innovation and style and their workers would create a true middle class.

    These tarrifs would be more useful than all of our military spending.

  2. Will Wilkin says:

    I read the whole article, but the central error in the ideas presented is stated in the first sentence, “policymakers express interest in cracking down on foreigners.” The ideas in this article get more bizzare and unworkable as one reads the rest, because it all flows from this central error stated up front. I hope it is an error, because the alternative explanation is it is a deliberate diversion of blame and attention in order to protect the multinational corporations and their purchased politicians, i.e., those interests that are actually growing richer than any class in history, and they are doing it through a systematic destruction of America’s industrial ecosystem and the looting of the jobs, savings, retirements and future opportunities of the American citizenry en masse.

    It seems any idea will be advanced except the most obvious and necessary: lay the responsibility for our problems where it belongs, in Washington DC where free trade policies have been made by politicians bought out by the multinational corporations and “too big to fail” Wall Street casino-banksters who have bought both political parties. In a grotesque attempt to avoid any criticism of American 1% and their Washington DC puppets, various proposals are put forward to “fix” our nation’s problems by blaming foreigners. And so we are offered proposals that will lead to trade wars and currency wars and, ultimately, shooting wars, but never disturb the dominant position of the 1% in the USA who have off-shored our industries for their private profits, used to buy the political system.

    Could it be that those who do not want to challenge or disturb the class of American super-rich will eventually declare the need for all-out world war before recognizing the need for reforms at home? As Michael Hudson wrote in an article published yesterday, “Over the past generation the wealthiest 1% have rewritten the tax laws to a point where they now receive an estimated 66% – two thirds – of all returns to wealth (interest, dividends, rents and capital gains), and a reported 93% of all income gains since the Wall Street bailout of September 2008.”

    Unfortunately, Mr. Hudson’s excellent analysis of the rapacious American financial sector has a variant of the tunnel-vision that seems universal to economists: he ignores the role of free trade policies and the resultant off-shoring when he writes “Instead of taxing the wealthy on their free lunch, the tax burden raises the cost of living and doing business. This is a major reason why the U.S. economy is being de-industrialized today.”

    Hudson’s article is still worth reading, as it describes incisively a major part of America’s problems in economy and the destructive political system posing as a democratic republic:

    http://www.counterpunch.org/2013/01/04/the-ideological-crisis-underlying-todays-tax-and-financial-policy/

    But getting back to the problems with the article at hand, I must wonder why is everyone so blind to the obvious solution: the Buffet Plan for using Import Certificates to balance our trade by limiting imports to the amount of our exports. Such a solution can be implemented by incrementally bringing a balance over just a few years. It would not target any specific country, thereby avoiding trade and currency wars (with potential to grow into more forceful confrontation), it would not depend on changing the behavior of other states that have no responsibility for our fate, it would not leave open all the back doors of non-targeted countries that would become the moving targets as capital and multinationals move their launch points into the American market. It would incentivize corporations that want access to our consumer market to make their productive investments here as well, thereby creating millions of jobs and growing our GDP and tax base. And it would provide guaranteed results via the import level control inherent in tying import licenses (ICs) to export levels.

  3. China Watcher says:

    The Buffett Plan would control the total value of imports, not the total volume. As such, it invites transfer pricing that would make the problem worse, not better. It would lead to more cheaper imports. The currency problem — and it extends beyond China — has been left unresolved since the devastating currency wars of the 1930s and needs to resolved now. In this regard, the lack of vision and resolve of American leaders since 1994 is astounding. At the same time, the US needs to stop subsidizing outsourcing and impose a consumption tax as virtually all other trading countries do.

    • Before we start a currency war with any nation, we should look to the ammunition we bring to the fight. Money is needed. And there are lot money in the U.S. But what is available to the Federal government to use in the fight? The official Reserve Assets of the U.S. was 606 Billion (as of Sept. 10, 2012). Foreign Official Assets in the U.S. was 5,614 Billion.

      I don’t know how currency wars are conducted. So I don’t know how relevant are these numbers. But anyone proposing to start a currency war should be able to assure us that the U.S. has whatever ammunition is needed to prevail.

    • Will Wilkin says:

      Hello China Watcher, You certainly make me think deeper about the problem, but I am not convinced currency wars would be constructive or effective. It seems there would always be a counter-move available in a never-ending game. And all the while, there would still be no real control over our imports. Your critique of the Buffet Plan gets back to currency values, ie, prices, which you say could be dropped to maintain the volume of imports displacing our domestic industry. Although there may be some truth to that, at least the Buffet Plan would directly address the imbalance of payments that has been leading to the transfer of assets described by Mr. Fletcher in his “Ignorance of the Professors” thread. Although the Buffet Plan might not solve every single problem in our economy, such as the loss of competitivenmess due to deteriorating infrastructure and diminished investments in R&D and science, it would halt the outflow of dollars that could then be used first to stimulate American manufacturing and then as GDP and tax base grow we could address these other problems. If you want to trace everyuthing back to currency manipulation, it seems we are putting ourselves in the position of demanding foreigners change their policies for our sake, which is preposterous. We should back away from the American habit of trying to dictate to the rest of the world who and how their governments will be run, and we should start taking responsibility for our own policies and our own fate through unilateral steps that respond to our own situation. This brings me back to my original and central critique in my comment at the top of this thread: our problems are not caused by foreigners, they are caused by American free trade policies in service to interests that have zero loyalty to the fate of the American people, starting with the multinational corporations writing our trade policy (look at who is writing the TPP) and Wall Street, both of which have become richer and more powerful than ever precisely through the off-shoring of our industries and through the global neo-liberal policies pushed by the IMF and World Bank demanding deregulation and privatization of all the countries they can control through debt and bribery.

      • Will Wilkins has many good ideas, except when he begins to tout the merits of Import Certificates. He says:
        1. “We can avoid trade and currency wars by not targeting any specific country”. I disagree. Targeting only 3 countries reduces the number of nations with whom we are in conflict. Not changing the rules for most of our trading partners puts the U.S. in a better position to withstand retaliation if China, Japan or Germany try to respond to the attacks on their trade surplus. We have no quarrel with nations whose trade with the U.S. is near balance.
        2. “It would not depend on changing the behavior of other states”. Wrong. Import certificates would be required for any import into the U.S.. including the 1.6 Trillion dollars of imports received from all the nations other than my targeted three (in 2011). Going to the trouble to purchase an import certificate changes behavior in a significant way (introduces uncertainty).
        3. “It would not leave open all the back doors of non-targeted countries that would become the moving targets as capital and multinationals move their launch points in to the American Market”. This is true. But moving trade to other countries is not a disadvantage to the U.S. To the contrary, moving imports to other nations is an advantage. Whatever trade deficit remains for the U.S. will not go to fund the military assets of China or to make the three nations more powerful. Spreading the advantages of trade around the world makes future wars less likely. I believe in forcing Domestic manufacturing production to remain competitive with all the nations EXCEPT the three that use the power of their government to maintain a large trade surplus with the U.S.
        4. “It would incentive corporations to move production to the U.S.”. True. But targeted tariffs would also provide incentives to move to the U.S..
        5.”It would provide guaranteed results”. True. But another program which only begins to move toward Balanced Trade will encounter less opposition in the U.S. Congress and abroad. The big hurdle is to reverse U.S. support for free trade. I prefer a beginning rather than 100% balanced trade as a first target.

      • I heartily support everything Will Wilkins says here.

  4. Mo says:

    Will when it comes to the 5 trillion estimated in corporate cash, yes if all that money was just spent on labor at current labor rates; then it could fund millions of jobs. But what has to be remembered is that when it comes to investment labor generally averages about 30% of total costs when it comes to making goods.

    If we look at the current environment, commodity prices are still at the high levels when there were millions of more people employed before the financial crisis. If material savings in the economy is low which I believe is, then when the 5 trillion is spent it is going to push up input prices very sharply. Raising input prices is going to have the effect of hurting many other branches of industries as squeezing profits will result in layoffs. So some jobs may be created at the expense of others. However, if material savings in the economy were high then investing 5 trillion would seriously dent the unemployment rate.

    For there to be investment material savings is needed. Resources can either go into consumption or investment. An example of consumption of resources would be oil being consumed by the military to drive tanks and fly planes and bombs made of rare metals exploding. For an example of investment, materials being used to improve infrastructure and the electricity grid. When resources are invested they help to improve the capital structure which serves to enhance productivity. Currently too many resources are being consumed and not invested for tomorrow. So just spending paper money is not going to fix the problem.

  5. Will Wilkin says:

    Hi Mo, I bet you are actually replying to my comments on this thread, right?

    http://www.tradereform.org/2012/12/moving-towards-balanced-trade/

    Regarding your insight that only 30% of investment is for wages, I wonder what other costs there ever are besides labor, except for rent, ie, interest dividends or indeed, rent. After all, besides rent or similar payments for access to land privately held, the cost of resources is in the labor to mine and refine it. The same is true for capital equipment. Besides the rent in paying for the rights to mine, the value in machinery comes from the labor that went into turning those raw materials into useful machines. Engineering and design, and the science behind it, are all just other forms of human labor. Wasn’t Ricardo onto something when he proposed the labor theory of value. Regarding that rent portion of costs, I recommend you click the link to Michael Hudson’s article that I posted in my original comment at the top of this thread. My critique of that article is that it ignores trade deficits in analyzing America’s economic problems, but I still recommend it for the analysis of the role of rent and debt in the systematic destruction of our country’s prosperity, which has been quite profitable for the biggest banks and the politicians they buy.

    • Mo says:

      Will yes I was responding from your post in that article. Besides labor costs there are costs of materials, utilities, etc.

      But the main point I’ve been trying to make is that a country only has a certain amount of resources that can be economically utilized at any give point of time. Those resources can either be invested to make the capital structure more productive which serves to raise real wages or resources can be diverted to areas where they get consumed and do not enhance the productive structure of the economy. Currently the US consumes and wastes too many resources instead of investing them. To see this one just has to look at the infrastructure of other industrialized countries as compared to the US today.

      In order to get the economy back on the right track, I do see the need for a sound monetary system which gets combined with trade reform. If there isn’t a sound monetary system in place that can’t be manipulated easily, then every time there is an election voters will continue to have to worry if they’ll ever elect anyone that will do the right thing.

      With regards to the Buffet plan. The problem I see with it besides an increase in bureaucracy is that it may lead regularly to bubbles with regards to prices for import certificiates. As long as there is a fractional reserve banking system in place that is not anchored to a commodity, any time a country inflates faster then a trade partner it will lead to trade deficits which means there will be increased demand to purchase the import certificates from exporters. If the prices for these import certificates get heavily distorted due to speculation, then manufacturers that need foreign inputs may find their profit margins being heavily squeezed which may result in unemployment or closing up of shop.

  6. ErikD says:

    Taxing the earnings of dollar denominated assets held by foreigners is intriguing. Wall Street would scream bloody murder as the appeal of the U.S. as an investment destination diminished. Helps explain Robert Rubin’s core belief in a strong dollar policy.

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