Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Currency Manipulation and Trade
Last week Edward Lazear published a opinion essay in the Wall Street Journal maintaining that "Chinese 'Currency Manipulation' Is Not the Problem." His argument is that changes in the exchange rate between the dollar, the euro, and the yuan have not led to rapid changes in the trade deficit of the United States.
Lazear does admit that trade flows have responded to changes in currency values, but he argues that these changes have been quite small. This is one of the reasons why we think a more muscular approach to balancing trade (e.g. import certificates or the scaled tariff) is called for.
Lazear draws a different conclusion, and his conclusion does not follow from his premises or his evidence. He closes as follows:
"But China's choice of exchange rate policy is not the source of China's export growth. Disappointing job and wage growth in the U.S. has much more to do with our economic policy than with the value of China's currency."
In other words... ignore the trade deficit with China.
But the conclusion does not follow from the premises. Mr. Lazear provides no evidence in his entire essay, not a shred, that there isn't a relationship between the trade deficit and U.S. economic problems. Instead, his entire argument is about the weakness of currency value adjustments in reducing trade deficits.
Lazear also ignores the relative trade positions of the U.S. and the Euro-zone. While the southern tier of the European continent consists of countries running trade deficits and paying the price for them, on the whole the Euro zone tends to run trade surpluses. This is a major contrast with the United States, and this difference might reasonably be attributed (at least in part) to the currency manipulations of China, Japan, and their many imitators.
And it should come as no surprise that the changes in the yuan's value have not produced dramatic and rapid changes in trade deficits. In the short term, an appreciation in the yuan boosts the price of China's exports leading to higher deficits. And long term adjustments require changes in supply chains that play out across multiple years. The tentative hints of 'on-shoring' by a few U.S. firms might be the beginnings of such a readjustment. And then there are all the non-currency ways China manipulates its trade.
Obviously there are other things the U.S. can and should do internally to boost its economy. But balancing trade with the rest of the world, including China, ought to also be on the menu. Given the wide range of non-currency methods China uses to sustain the trade deficit in addition to its currency manipulations, our response should also be multifaceted.
Journal of Economic Literature:
Atlantic Economic Journal: