Currency Manipulation Myths and Realities

Since the beginning of 2016, global markets experienced steep declines for which many blame the People’s Bank of China as the major cause with claims that China was  artificially devaluing its currency unfairly against the US dollar, in turn, harming the American economy. The emerging economies also felt that they were being ambushed by the near zero interest rate strategy of the developing economies. The Chinese currency was therefore viewed as the weapon towards the destruction of the economy. However, on 22nd May 2016, the US Senate defeated an amendment to the Trade Promotion Act. Had the amendments been passed, then trade pacts would have been required to include provisions for penalizing countries that would have been found to be currency manipulators. Policymakers, on the other hand, had the intention of destructing the Trade Promotion Authority as a way of charging China with currency manipulation. 

Countries that are said to be currency manipulators tend to sell their currencies in foreign exchange markets, usually against dollars, with the intention of making their currencies weak and the dollar stronger. Such countries also opt to subsidize their exports and raise the prices of imports in a bid to increase the surplus. Later, the International Monetary Fund declared that neither China nor Japan met its criteria for being currency manipulators. This was after the two countries, amongst others, were placed on a monitoring list as potential violators of fair currency practices, and they were then scrutinized to determine if they indeed engaged in the malpractice. On the other hand, the founder and the former chief of the Peterson Institute for International Economics, Fred Bergsten, initially had his opinion that China and nineteen other countries cost America about five million jobs, but he later felt that China had changed and was no longer a currency manipulator. Others like Sebastian claimed that China’s alleged currency manipulation created cheap currency and a trade surplus in China that poured into the US markets creating the mortgage bubble that eventually led to the financial crisis.

Since 2005, China who runs a floating peg system has its currency pegged at a fixed rate against the dollar. This has acted as a buffer by protecting the currency from being disrupted by the market and in turn preventing the economy from being destabilized. Schumer felt that the RMB was undervalued by 33% despite its appreciation; he, therefore, made a bill that would have put 27 % tariff on imports from China. Nonetheless, the bill never became low. On 26th May of the same year, the IMF later announced that the RMB was no longer undervalued, and employees at the Peterson Institute later implied that the RMB needed to appreciate by about 10% on the trade-weighted basis by totally eliminating its current account surplus. This meant that many felt the RMB was undervalued. The myth behind this undervalued currency was that it was a major economic advantage to the country; however, this is not the case. In the real sense, the undervalued currency would make imports more expensive, and in return, the customers would have a lower buying power. However, if the undervaluation is sustained, then production shifts towards exports rather than the home market. Eventually, jobs  become dependent on key global customers.

There was also a myth that Japan was labeled as a currency manipulator. In the real sense, Japan has not intervened in foreign exchange markets since the end of 2011, and the movement of the Yen has been a result of the monetary easing policy that has been implemented by the Bank of Japan, alongside with the market sentiments that the US interest rates would rise. Tokyo also agreed with the demands by the US Treasury and the European Union that it would not include any purchase of foreign assets under its monetary easing.

Another dispelling myth is that China’s exchange rate policies did cost for millions of Americans their jobs as a result of the deficit in China which was created by the undervalued currency and the foreign currency manipulation. Moreover, some reports by Bergsten and his allies claimed that the US had lost one to five million jobs due to this currency manipulation (Katz, 2015). However, to reach the reliable facts and denounce the myths, China devalued the Yuan in 1994 and was labeled a currency manipulator yet American employment remained low amidst the high labor force participation even five years later. China then yielded to American protectionists demands to make the Yuan more valuable yet the unemployment continued rising amidst a declining labor force participation.  

As mentioned above, cheaper Yuan worsens the trade deficit since demand shifts away from American-made factory goods. Thus, Chinese products capture a larger market share. On the other hand, higher Yuan would mean the low-skill jobs in textile or assembly industries are sent to other low-wage countries as opposed to the US. With the GDP in America growing, the higher demand that is present tends to absorb imports at a faster rate than that which it can expand its exports. This also means that the demand for manufactured goods consequently grows to make factory jobs more attractive since they do best when trade deficit happens.

Another myth and fear that faced people were that the Chinese Yuan was rapidly rising and was soon going to challenge the dollar as the top global currency. However, the fact is that the Yuan is still dependent on the dollar, and therefore, it rises against other currencies just as the dollar rises and similarly falls just as the dollar falls. Any move by the IMF to add Yuan as a major currency would benefit the dollar by increasing its importance and value.  If China wanted the Yuan to become the independent currency, then it would be forced to allow the free flow of money in and out of China, therefore, breaking the dollar peg. China, however, faces bigger challenges such as limitation of its competition owing to the fact that large portions of its market are isolated from American goods.

Moving forward, the main TPP partners are therefore not currency manipulators, and their main focus is simply to improve trade within North America. Various problems have been highlighted, but the focus should be on providing a solution rather than looking for excuses and the guilty. For instance, the workers who lost their jobs as a result of productivity gains may be provided with new jobs as well as given training and technological improvements to help them acquire the right skills for the jobs. A leaf can be borrowed from countries like German who spend 1-2 % of their GDP on active labor measures such as giving subsidies for training or even matching employers to the ideal employees who suit best their needs. Europe, on the other hand, spent much on helping workers’ transition from one job to another and providing them with a safety net during the transition. Most of the problems experienced in America are self-created, and this fact should be  recognized and accepted. Germany and Europe should, therefore, be examples to the US who desire free trade.