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Ending Currency Manipulation—Just Follow the Money

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Robert ScottReposted from the Economic Policy Institute blog


Ending Currency Manipulation—Just Follow the Money

Robert Scott  |  March 6, 2014  |  Economic Policy Institute

Growing trade deficits have cost US workers millions of jobs over the past two decades, (these were good jobs in manufacturing industries).  Currency manipulation by more than 20 countries, of which China is by far the largest, is the single most important reason why U.S. trade deficits have not decisively reversed.  Currency manipulation lowers the value of foreign currencies, relative to the U.S. dollar, which acts like a subsidy to their exports, and a tax on U.S. exports to China and every other country where the U.S. competes with the exports of currency manipulators.

In an era of fiscal austerity, ending global currency manipulation is the best way to reduce trade deficits, create jobs, and rebuild the U.S. economy, as shown in Stop Currency Manipulation and Create Millions of Jobs.   Eliminating currency manipulation would reduce the U.S. trade deficit by between $200 billion and $500 billion in three years. This would increase annual U.S. GDP by between $288 billion and $720 billion and create 2.3 million to 5.8 million jobs. About 40 percent of the jobs gained would be in manufacturing.

Ending currency manipulation would not require any government spending – a key political virtue during this time of Congressional gridlock. In fact, it would reduce the federal budget deficit by up to $266 billion dollars per year as the extra economic activity and employment it creates boosts tax revenues and reduces safety net spending. Ending currency manipulation would create jobs in every state, with gains from 8,200 jobs (2.64 percent of total employment) in the District of Columbia to 687,100 jobs (4.18 percent of employment) in California. Ending currency manipulation would likely create jobs in every Congressional District, with gains of up to 24,400 jobs (7.05 percent of employment) in the 17th District in CA.


The importance of exchange rate manipulation in driving global trade imbalances is clear. There is a near perfect correlation between official purchases of foreign exchange reserves and the global current account surpluses of currency manipulators, as shown in the Figure below.  Joe Gagnon has shown that causation runs from currency manipulation to trade surpluses, and not the other way around.[1]  The data shown in this graph exclude asset purchases by government-owned “sovereign wealth funds,”(SWFs) which now control over $6.3 trillion dollars in assets.  For example, the China Investment Corporation, one of three Chinese sovereign wealth funds, founded in 2007 with an initial investment of $200 billion, increased to $575 billion in 2013. If asset purchases by SWFs were included, this graph would reveal an even tighter correlation between purchases of foreign exchange and the current account surpluses of currency manipulators.

One important policy insight from this graph and from Gagnon’s research is that policymakers no longer need to estimate the equilibrium value of the yuan or any other manipulated currency; they also do not need to estimate the degree to which they are undervalued (as the Treasury attempts in its semi-annual Reports to Congress on Exchange Rate Policies).  The policy linkage goes directly from purchases of Foreign Exchange and other assets by foreign governments to increased trade and current account surpluses. Or, to put it another way, the simple fact that countries  purchase huge amounts of foreign assets is proof that exchange rates are out of alignment for moving trade closer to balance. Some have argued that because there has been some non-zero appreciation of the Chinese currency in recent years that this proves the importance of currency manipulation is much attenuated.  No, and the proof is that China continues to buy large amounts of U.S. assets, which keeps the appreciation of their currency smaller than it would otherwise have been absent this market distortion.

Thus, for example, dollars have been pouring into China for more than a decade in search of Chinese goods, FDI and financial assets. But for China’s massive capital exports (as reflected in the $4 trillion it has invested in foreign assets since 2000), the value of the yuan would have risen much more rapidly than it has over the past decade.  The key to ending currency manipulation is to simply stop or offset purchases of U.S. assets by China and other currency manipulators.

There are a number of steps that Congress and President Obama can take to end currency manipulation, which would reduce our trade deficit and bring millions of manufacturing jobs back to the United States.  First, Congress should pass pending legislation (HR 1276 and S 1114) that would allow the Commerce Department to treat currency manipulation as a subsidy in countervailing duty trade cases. In addition, the President and federal agencies already possess the tools needed to end currency manipulation.  The Treasury and Federal Reserve administration have the authority needed to offset purchases of foreign assets by foreign governments by engaging in countervailing currency intervention.  By taking these steps, the U.S. government could make efforts by foreign governments to manipulate their currencies costly and/or ineffective.

Congress and the President have an opportunity to act now to end currency manipulation, a policy that will create 2.3 to 5.8 million jobs and increase U.S. GDP and reduce the budget deficit at no cost to the government.  What better legacy could the president leave behind than a fully employed labor force with a growing and revitalized manufacturing sector?   The key is to put an end to foreign purchases of U.S. assets—the markets will take care of the rest.

[1] Gagnon has estimated that a “country’s current account balance increases between 60 and 100 cents for each dollar spent on intervention.”


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5 Responses to “Ending Currency Manipulation—Just Follow the Money”

  1. William Ryan says:

    “Follow the money” is right. You do not have to be a rocket scientist-economist to do the simple math… All you have to do is ask yourself who benefited the most from the miss leading -named “free trade policy” since NAFTA went into effect? Big corporations benefited the most who have no loyalty to America or the American worker. We all need to push hard in Washington now for a more balanced-fair trade policy that will include American manufacturing and American workers. The time has come and the time is now to set aside any fast tracking and currency manipulation trade policies are done.

  2. Milt Heft says:

    Currency manipulation by foreign countries is NOT the basic cause of our trade deficit. By CPA’s own figures, 60,000 American factories have closed down here and relocated “there” mostly in China, leaving 6 MILLION American workers unemployed. Given a 3;1 ratio of service to production, that means another 18 MILLION service jobs have been lost. That’s the whole ball game and currency manipulation isn’t even a shadow. Let’s put the blame where it belongs: not on foreign currency manipulators, but on American OUTSOURCERS. An easy fix to bring trade back in balance is establishing careful IMPORT TARIFFS which will immediately discourage OUTSOURCING and reduce imports.

  3. Hugh J Campbell, Jr. CPA says:

    All exporters from countries with value-added-taxes (VAT) benefit from those governments’ eliminating (border-adjusting) VATs on exports.

    All exporters from currency manipulation countries, including American OUTSOURCERS benefit from those governments’ currency manipulation.

    In addition American OUTSOURCERS benefit from the US Federal income tax deferral of foreign sourced income.

    Therefore, the United States’ inability border-adjust any taxes, currency manipulation by some of our trading partner governments and the U.S. Federal tax code incentivizing foreign sourced income are all contributing causes to our trade deficit.

  4. Andy V says:

    This would help currency manipulation:
    ……..snip…… that the G20 countries will implement the IMF 2010 Reforms without the US if Congress doesn’t pass the required legislation by April.

    “It was agreed that in the absence of progress by the United States on the 2010 package by the April meeting of the IMF and G20, that there will be formulated a list of ‘bad options,’ which will allow to move forward in this matter, excluding the opinions of the United States.”

    Congress for its part is attempting to attach the reforms to the Ukrainian aid package which will be put before the Senate next Tuesday. But if they are waiting for any concessions from Russia before passing it, I don’t think those concessions will be forthcoming.

  5. Bruce Bishop says:

    Currency manipulation is a PHONY issue which distracts from the REAL solution, which is government mandated “BALANCED TRADE” (Google it.)

    “To keep eyes off of the loss of jobs to offshoring, policymakers and their minions in the financial presss blame U.S. unemployment on alleged currency manipulation by China and on the financial crisis.” Paul Craig Roberts, 10/28/10, Counterpunch.

    Chinese currency rose 17.5% against the dollar between 2006 and 2010 with NO reduction in the U.S. trade deficit.

    Our government has NO INTEREST in saving or bringing back U.S. manufacturing jobs. As more and more people become dependent on the government, that means more and more votes for people who favor big-government solutions.


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