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Currency Manipulation Costs and Solutions
Jesse Richman, 9/30/2013

Peterson Institute Policy Brief 12-25 has a series of important proposals related to fighting currency manipulation. Some key quotes.  

"More than 20 countries have increased their aggregate foreign exchange reserves and other official foreign assets by an annual average of nearly $1 trillion in recent years. This buildup—mainly through intervention in the foreign exchange markets—keeps the currencies of the interveners substantially undervalued, thus boosting their international competitiveness and trade surpluses. The corresponding trade deficits are spread around the world, but the largest share of the loss centers on the United States, whose trade deficit has increased by $200 billion to $500 billion per year. The United States has lost 1 million to 5 million jobs as a result of this foreign currency manipulation."

The report names names of currency manipulators.  

"China, Denmark, Hong Kong, Korea, Malaysia, Singapore, Switzerland, and Taiwan. Japan may need to be added if it pursues new Prime Minister Abe's stated intention to force a sharply weaker yen through dollar purchases." 

It also identifies several good proposals for targeting them, including two (1 and 2) that we made in Trading Away Our Future back in 2008.  

"(1) undertake countervailing currency intervention (CCI) against countries with convertible currencies by buying amounts of their currencies equal to the amounts of dollars they are buying themselves, to neutralize the impact on exchange rates, (2) tax the earnings on, or restrict further purchases of, dollar assets acquired by intervening countries with inconvertible currencies (where CCI could therefore not be fully effective) to penalize them for building up these positions, (3) treat manipulated exchange rates as export subsidies for purposes of levying countervailing import duties, and (4) hopefully with other adversely affected countries, bring a case against the manipulators in the World Trade Organization that would authorize more wide-ranging trade retaliation."

It is truly remarkable and sad that we ENCOURAGE asset purchases by currency manipulators by not taxing them at all.  And it is unfortunate that the United States maintains currency reserves able to pay for our exports for only a few days, when a policy of counter-intervention would provide significant short and long term benefits. 

But Bergsten and Gagnon should go farther.  What would really solve the issue of currency manipulation and imbalanced trade would be a global system that is aimed at preserving balanced trade.  The flawed current system has failed to do so.  

They write: 

"it is a huge irony that the Bretton Woods system was created at the end of the Second World War primarily to avoid repeating the disastrous experiences of the inter-war period with competitive devaluations, which led to currency wars and trade wars that in turn contributed importantly to the Great Depression, but that the system has failed to do so."

What is needed is for the trading system to shift toward Keynes' intentions for Bretton Woods -- a system that gives the need for balanced trade top billing, and provides effective means to accomplish that end. 

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Comment by Jesse, 9/31/2013:

Another paper from the Peterson Institute worth checking out is

Williamson, J.H. 2011. Getting Surplus Countries to Adjust. PIIE Policy Brief 11-1. Washington: Peterson
Institute for International Economics.




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