Currency manipulation is one of the biggest issues in the congressional fight over Trade Promotion Authority. Previous versions of Trade Promotion Authority have included the reduction of currency manipulation by foreign governments as a U.S. negotiating objective for trade talks. Draft legislation just introduced strengthens that language, and critics are asking for more.
The problem with this debate is there is little if any evidence of successful long-term currency manipulation by foreign governments and even less of any negative consequences for the U.S. economy. This is part of an age-old debate in Washington between those who want to weaken our currency and those who favor a strong dollar.
On the strong-dollar side are consumers, such as anyone who uses gasoline or heating oil, U.S. investors, and those who see that having the dollar as the international reserve currency is a huge economic and strategic advantage. On the other side are U.S. exporters of price-sensitive products, who can sell more of their wares overseas if the dollar is weak. U.S. policy in the modern era generally has favored a strong dollar.
President Reagan was a frequent defender of a strong dollar, regarding it as “one of our greatest weapons against inflation.” The Clinton administration also defended a strong dollar during a period of considerable controversy regarding the value of the Japanese yen. Despite this support from presidents of both parties, the actual value of the dollar compared to other major currencies has declined substantially over recent decades, likely a result of the long-term structural rebalancing of the world economy.
The real question, more or less ignored in the current trade debate, is whether currency manipulation by others is a problem for the U.S. There is no easy answer. Once governments intervene in an exchange market, it becomes difficult to know what the true market rate of their currency should be. Is the Japanese yen undervalued against the U.S. dollar? Who knows?
What we do know is the major Asian currencies—the yen and the Chinese yuan—both over the long run have been strengthening against the dollar. It now takes about 119 yen to equal $1. That’s about the same amount as 20 years ago, but far fewer than it took in 1971, when the exchange rate was about 350 yen to $1. If the Japanese have been intervening to drive down the value of their currency (as the weak-dollar faction in the trade promotion authority debate would have us believe), they are not doing a very good job of it.
It’s the same story for the Chinese yuan. Today, it takes about 6.2 yuan to equal $1. Fifteen years ago, the rate was about 8.2 yuan to $1. No one knows what the “right” rate should be. But we do know the trend for the yuan is to strengthen against the dollar.
We also know U.S. countermeasures that attempt to artificially lower the value of the dollar in retaliation for currency manipulation by others likely would have negative effects on the U.S. economy. Prices would rise, investment would fall. Long-term growth likely would decline.
The inclusion of currency manipulation as a concern in the Trade Promotion Authority is, at bottom, an attempt by anti-trade forces in the U.S. to legitimize another form of U.S. protectionism. The data doesn’t support the view that currency manipulation by other countries is hurting the U.S. Legitimizing U.S. measures to counter it most certainly would.