Currency Manipulation in China And Japan
As you may have heard, New York Senator Charles Schumer is on a campaign to slap a 27.5% tariff on all Chinese goods unless they significantly revalue or float the yuan. But he denies being a protectionist. No, you see he merely claims to be opposed to currency manipulation. His threat of tariffs are meant to force the Chinese to end their currency manipulation.
Had he been genuinely opposed to currency manipulation he would favor the abolition of the People's Bank of China, the Federal Reserve and all other central banks. Any currency created by a central bank is bound to be manipulated. In fact, manipulating the currency is the task for which central banks were created for. If they didn't manipulate the currency, there would be no reason to have a central bank.
Needless to say, Senator Schumer, being a unrepentant statist, don't favor the abolition of the Fed or call for the Chinese to do away with the People's Bank of China. Instead he calls for the Chinese to do away with their peg to the dollar and float the yuan. According to Senator Schumer, currency pegs represent manipulation while currency floats doesn't.
But how could it be argued that a floating fiat currency is not manipulated? First of all, the very existence of exchange rate fluctuations between different geographic areas is a manipulation as a free market monetary system -the gold standard- would not have such fluctuations based on national borders.
And moreover,while its price is settled on currency exchange markets, the price is heavily influenced by the central bank even in the absence of direct currency market interventions of the sort many Asian countries practiced in 2004. Through its direct control of short-term interest rates as well as the strong influence on money supply and long-term interest rates this imply, central banks strongly influence exchange rates and often use that influence in a mercantilist ways. This means that even if we narrow the definition of currency manipulation to manipulation of the currency for mercantilist purposes, floating currencies are certainly manipulated.
During 2005, interest rates have been a even more powerful tool than ever for central banks to influence exchange rates as exchange rate movements have shown a stronger correlation with interest rate movements and levels than ever before . The two big losers among currencies this year have been the Japanese yen and the Swedish krona, something which can be attributed to the zero interest rates in Japan and the interest rate cut from 2% to 1.5% in Sweden. The euro have risen against both the yen and the krona as its interest rates have risen slightly, but have fallen against the U.S. dollar where interest rates have gradually risen. The dollar in turn have fallen sharply against the Brazilian real as Brazil have kept short-term interest rates at double digit levels in both real and nominal terms. This development can largely be attributed to hedge funds increasingly engaging in so-called carry trade (interest rate arbitrage) by borrowing short in yen and kronor and investing them in American and Brazilian fixed-income securities.
Compare the cases of China and Japan. China can with some credibility claim that its peg was not instituted for mercantilist reasons as it did not take the opportunity that existed during the Asian crisis 1997-98 to devalue the yuan, despite the fact that it came under heavy pressure to do so.
Japan on the other hand must be judged more harshly in light of recent developments.
When the yen rose in 2004 because the markets were worried about the U.S. current account deficit it intervened heavily on the currency markets and bought large quantities of U.S. government bonds. This , they claimed, was not made for mercantilist reasons, but because they wanted to minimize the erratic exchange rate fluctuations that otherwise would have occurred.
During 2005 when the yen have fallen sharply against the dollar, with a dollar now costing 121 yen versus 103 yen in January, it have merely stopped buying U.S. government bonds. But had it really been sincere in its quest to avoid erratic exchange rate fluctuations, they should now not just not buy more U.S. bonds, but start selling those they previously accumulated. Yet this have not been done, and Japanese officials have in fact expressed satisfaction with the yen slide as they know it will benefit their exporters and help them combat the alleged scourge of deflation.
As we have seen with Japan, having a currency float is thus more effective if you wish to manipulate your currency for mercantilist reason. If China really wanted to nail Senator Schumer, they could just adopt Japanese strategy of having a currency float and then reduce interest rates and undertake other measures to encourage capital flight. Then the yuan would actually end up weaker than it is now, while Senator Schumer would be deprived of its argument for imposing tariffs.
Comments (8)
Paul Edwards
Being a "Senator" and "opposed to currency manipulation" is a contradiction in terms. Schumer isn't a protectionist? Ha! I wish these clowns would say something stupid for the purpose of getting a laugh out of their constituents, rather than simply to further bamboozle them all the time. But i guess that's partly up to the constituents isn't it.
Published: December 5, 2005 1:30 PM
Jim Bradley
I wonder if Schumer realizes that his action could create a massive dislocation in the bond markets and thus create a depression which could certainly make it worse off for his constituency. What a joke -- he can't even steal right!
Published: December 5, 2005 2:01 PM
Curt Howland
Shumer is what would charitably be called in my youth, a "butt-in-ski".
What might be worst of all is that he's not stupid by any measure. I think he has always known exactly what he's doing.
Published: December 5, 2005 2:28 PM
Yancey Ward
Curt,
He may not be stupid, but he certainly is ignorant.
Published: December 5, 2005 4:09 PM
The cat
China devalued 50% in 1994. Subsequently in 1997-8 they did not do so any further though according to new reports only in response to outside pressure.
Published: December 6, 2005 6:41 AM
The cat
China devalued 50% in 1994. Subsequently in 1997-8 they did not do so any further though according to news reports only in response to outside pressure.
Published: December 6, 2005 6:41 AM
John
Ok. China most certainly is manipulating its currency. In free trade how else would a nation accumulate trillion reserves? Devaluing and manipulating are different. Manipulating is a phenomenon that pertains only to the $/yuan ratio.
They accept our increasing supply of dollars for their goods, they use our dollars to buy treasury notes, thus sending us our dollars back, kind of. Simultaneously, as these dollars are flooding, they print enough yuan to maintain the 7:1 ratio, when it should be decreasing. To prevent bad domestic inflation, they curtail lending through communist means, and force people to save at ridiculously low interest rates.
CHINA is certainly a currency manipulator. There is no arguing that matter.
Published: January 26, 2009 6:04 PM
Royce
This is not a single issue. There are many factors involved in trade besides labor and shipping costs. Some of the items include environmental effects, i.e. the ability to industry to pollute more by off shoring work, currency manipulation by our Asian trading partners, especially Japan and China and the value of the dollar and its ability to buy imports. The number one issue that should be addressed first is currency manipulation. Currency manipulation is the practice of artificially setting exchange rates by the central banks of some of the U.S. trading partners in order to gain an unfair advantage. In addition to distorting the market, it is an illegal practice under both U.S. law and international agreements.
A number of our trading partners are manipulating the currency markets to keep the U.S. dollar artificially high, and their own currencies artificially low. By exploiting the world currency markets, countries like China and Japan effectively subsidize their exports to the U.S., and place a tariff on U.S. shipments to them. This manipulation is taking place on a massive scale. Japan's yen subsidy provides the average imported Japanese car a $4,000 windfall cost advantage over U.S. automakers and other competitors in the U.S. market -- a windfall that ranges up to $10,000 per vehicle for higher-end Japanese imported SUVs such as those sold by Toyota under the Lexus brand.
By some estimates, China’s Yuan is undervalued by as much as 40 percent in comparison to the U.S. dollar. If China obtains a 40% advantage by manipulating its currency this encourages companies to locate there to take advantage of it or simply purchase goods produced there, i.e., Wal-Mart spent over $16 billion in China last year. Companies like Wal-Mart lobby congress not to fix the problem because they profit from it and do so under the guise of "helping the consumer", the same consumer that just lost his/her job do to off shoring.
The effects of China’s manipulated and subsidized currency, for example, are extensive. First, China’s currency manipulation has contributed to the dramatic increase in the U.S. bilateral trade deficit with China, which now tops $232 billion a year. China has amassed foreign exchange reserves of more than $1 trillion, far surpassing any other nation’s reserves. China’s currency manipulation also attracts foreign investment into China and away from American manufacturing facilities. This flow of investment has already cost American workers their jobs.
Additionally, currency manipulation results in a sizeable difference in labor costs. This difference creates the illusion of a comparative advantage for a given country. Ultimately, currency manipulation is a subsidy that can put American manufacturers at an unfair disadvantage in the global marketplace. The inability, and in many cases the unwillingness, of policymakers in Washington to enforce current trade laws has allowed the deck to be stacked against U.S. manufacturers and workers. As a result, U.S. manufacturers have been forced to play by a different set of rules than their competitors. This has contributed to the loss of more than 4.0 million manufacturing jobs since 2000 and the closing of more than 40,000 manufacturing facilities.
A new Peterson Institute for International Economics report by 30 leading economists called for an increase of 25-30 percent in the value of the yen to the dollar. The report called for adjusting the yen/dollar exchange rate from the current level of about 118 yen/dollar to 90 yen/dollar, consistent with ATPC's previous estimates. The report identified "large and unsustainable imbalances in current account practices" as one of the principal dangers facing the world economy today and calls on policymakers "to reduce the risks of a crisis that could produce a world recession."
Bottom line, you have been sold out by your Congress in exchange for campaign contributions.
Published: March 31, 2009 1:46 PM