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Five Other Facts You Need to Know About Currency Manipulation

One of the sections in tonight’s foreign policy debate concerns China, which means that the issue of Chinese trade will come up. In a very real sense, this will trigger a fake debate about the manipulation of Chinese currency. I say fake because, while Mitt Romney will demand such a designation, he has no interest in actually following through, and everyone knows it. If he did, the strongest thing he could have done would have been to lean on his party to pass the Senate-passed bill that deals with currency manipulation in general. But he didn’t. Because it’s not a central preoccupation so much as it is a line of attack.

When this heated up in September I made a prediction:

The constituency that really doesn’t want to see a currency manipulation bill pass Congress would be multinational corporations, who see value in siting their factories overseas and taking advantage of the low currency to deliver cheap imports. And they are sure to pick up on a datapoint about China and their currency that does disqualify some of Romney’s shtick, but does not in any way diminish the importance of the bill.

Over the last year, you see, China has largely stopped manipulating its currency, according to Joseph Gagnon of the Peterson Institute for International Economics. However, other countries have filled the gap, including Malaysia, Thailand, the Philippines, Singapore and Switzerland. This adds up, according to Gagnon’s policy brief, to $1.5 trillion annually (that measures the total government purchases around the world in other countries’ assets, the typical method for keeping their currency value low). That’s up from a $1 trillion estimate at the beginning of the year. Even as China’s share of this $1.5 trillion has fallen, the total currency manipulation annually has not, suggesting that this remains a serious problem. And this directly impedes the US recovery, Gagnon says.

In fact, Gagnon estimates a hit from currency manipulation at around 4% of GDP, which translates into “at least four million jobs and maybe more.”

We are getting this backlash about China’s currency manipulation. They have allowed the renminbi to appreciate, we hear. Other countries’ currency manipulation has exceeded them. And anyway, branding China a currency manipulator would be counter-productive.

Since Ezra Klein put this in terms of “five facts you need to know about China’s currency manipulation,” let me do the same, piling on some additional facts.

1) The overall currency manipulation, which props up the dollar and harms US exports, remains as high as it was when China was aggressively manipulating its currency. As I wrote back in September, the $1.5 trillion in overall manipulation represents 4% of GDP, and just because China’s not doing it anymore (more precisely, doing it with less aggressiveness) doesn’t mean it goes away as a problem.

2) The legislation on the table would empower the Treasury Department to brand ANYONE a currency manipulator who is engaged in the practice, and allows for higher tariffs in that event. This falls in line with Joseph Gagnon’s prescription for combating currency manipulations, that the way to stop them is to “tax it heavily.” And since the bill would impact Singapore, Malaysia, Taiwan, the Philippines and Switzerland as much as it would China, it makes sense to take the step.

3) The threat of trade wars means less with China out of the picture. Ezra writes:

On its own, its nothing but an international insult. But if you follow through, then it’s a first step towards slapping tariffs on Chinese goods. But then China can begin slapping retaliatory tariffs on our goods. Does anyone think that a trade war with China would be a good thing right now? If so, why?

This directly contradicts the idea that China is no longer a big player in the currency manipulation game. If they no longer push on this front, they have nothing to worry about from the tariffs. The real countries that would be affected would be Singapore, Malaysia, etc. Does anyone really think that a trade war with Singapore would be anything but one-sided? Would Malaysia really have a recourse other than stopping their practices if the United States cracked down? China’s lessening of their currency manipulation IMPROVES the possibility of getting a handle on it globally.

4) Plenty of experts think calling China, or any other country, a “currency manipulator” will work. The Economic Policy Institute has consistently said that this directly impacts 2 million jobs. Furthermore, the expert that Ezra cited, Joseph Gagnon, thinks branding currency manipulators can have a positive impact. As I’ve said, Gagnon very specifically highlights the use of tariffs:

Countries affected by currency manipulation would be authorized to impose tariffs on imports from manipulators. In order to get manipulators to agree to this change in international rules, the main targets of currency manipulation—the United States and the euro area—may have to play tough. One strategy would be to tax or otherwise restrict purchases of US and euro area financial assets by currency manipulators.

This falls completely in line with the legislation on the table.

5) The only important actor in this whole episode is John Boehner. The reason that legislation isn’t on President Obama’s desk right now on currency manipulation is the Republican Speaker of the House. He resisted efforts to get a floor vote on the Senate-passed currency manipulation bill, even though a majority of the House supports it.

I doubt the discussion of this issue will get past the bumper-sticker stage tonight, particularly because neither candidate wants to commit to something they don’t want to do. But we can explain this intelligently without falling into these traps. Policies that would make US exports more attractive and stop cheating in the global currency markets have a place in the economic discussion. It’s not protectionist or counter-productive to make that claim.

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David Dayen

David Dayen