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Some policymakers and pundits have argued that currency manipulation–the effort to keep exports cheap by intervening in the foreign exchange market–is the most important issue international economic policy could address. Friday evening, the Senate rejected an amendment by Sens. Rob Portman (R., Ohio) and Debbie Stabenow (D., Mich.) that would have punished currency manipulators. The White House has responded to pressure from Congress, signaling a willingness to bring exchange-rate provisions into trade negotiations, but does not want binding sanctions against currency manipulators to be part of the Pacific trade agreement under consideration.

https://www.brookings.edu/articles/what-you-may-not-know-about-china-and-currency-manipulation/

Why doesn't Washington want to enact a law to punish all currency manipulators, including China? For some time, Washington complained about currency manipulation, it wasn't just China, before China it complained about Japanese currency manipulation. However, it refused to enact a law to punish all currency manipulators. Did Washington provide a reason for why it doesn't want to enact a law against currency manipulators?

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    The linked article was from 2015. With regards to Japan, the Plaza Accord was spurred in no small part by US industry insisting something be done about exchange rate. This was a very heavy intervention. With regard to China, the exchange rate was since the financial crisis heavily stabilized and roughly fixed against a dollar-euro basket by PBOC. Results seen here: google.com/finance/quote/USD-CNY?window=MAX ... Besides that, due to the trade deficit, falling USD would have brought inflation to the US economy in the short term, which the FED was then fighting mightily to prevent
    – Pete W
    Mar 3 at 15:28
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    "Why doesn't Washington want to enact a law to punish...?" American law or International law? Who be the judge?
    – r13
    Mar 3 at 15:34
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    This Q incorrectly assumes "currency manipulation" is something bad that must be punished (and also that there is something well-defined called "currency manipulation" that can be identified and punished). Are all countries with fixed exchange rates "currency manipulators" and should they be punished? "Currency manipulation" is an ill-defined term that sounds evil and captures the imaginations of laypersons (and so railing against it is a popular tactic among some politicians in the US and elsewhere).
    – user103496
    Mar 4 at 10:41
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    Well, does the USA want to impose sanctions on China? If yes, couldn't they already do that? If no, why would you want to pass a law that forces you to take an action you don't want to take?
    – xLeitix
    Mar 5 at 13:15
  • Why might Washington, or any jurisdiction, want to punish currency manipulators, whether or not including China? All jurisdictions clearly should but that seems like your and my view. Mar 5 at 23:58

3 Answers 3

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Countries have limited options to punish other countries. There's sanctions and there is war. I hope it is obvious why war is a bad idea for punishing perceived economic misdeeds. Economic sanctions could be on the table, but it is important to remember that these hurt both sides. If the US were to place significant sanctions on China, that would essentially boil down to "We will stop buying your stuff". The obvious downside is not getting the stuff anymore.

Basically, sanctions are only really viable if invoked by a huge economy against a relatively small one. The US, EU and some others teaming up against Russia is probably as far as "sanctioning a larger country" will go.

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    While being interesting I would like to point out that this answer is speculation and there isn't any official statement or statistical observation included backing it up. It may be true or it may be wrong and something else may be the case. It's more like a hypothesis. Mar 3 at 20:30
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    @NoDataDumpNoContribution: economics theory backs this up actually. See economics.stackexchange.com/questions/29310/… and in particular jstor.org/stable/2526808 Mar 3 at 23:18
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    Don't forget tariffs. They worked so well for DJT.
    – Barmar
    Mar 4 at 15:15
  • @NoDataDumpNoContribution yeah but since NOBODY has given any "official real" (eg non speculative) reason, the best answer will be speculative. In fact even gravity is "speculative"
    – Hobbamok
    Mar 5 at 15:28
  • @Hobbamok Sorry, but my point is not that this may be the "best available answer here" but that it overall has only limited value. Not sure if there are facts or not to be uncovered about this question. Mar 5 at 16:19
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Did Washington provide a reason for why it doesn't want to enact a law against currency manipulators?

They kinda have one on the books:

According to the Trade Facilitation and Trade Enforcement Act of 2015, the Secretary of the Treasury must publish a semi-annual report in which the developments in international economic and exchange rate policies are reviewed. If a country is labeled a currency manipulator under this Act, "The President, through Treasury, shall take specified remedial action against any such countries that fail to adopt policies to correct the undervaluation of their currency and trade surplus with the United States."

What they're not willing always do is enforce it. As with many sanctions-related laws, there's substantial leeway given to the executive, for reasons explained in Arno's answer.

What's not quoted in Wikipedia but immediately follows in that law is

The President may waive this requirement, however, if it would have an adverse impact on the U.S. economy or would cause serious harm to U.S. national security.

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    In line with Amo's reasoning, we might expect the executive to "waive this requirement" quite often, since currency manipulation is hard to notice if it is not having any fiscal ("economic") effects. Cynically, one might therefore speculate that one of the purposes of this law is to have an option for punishing much smaller trading partners, and the mere existence of the option is itself intended to have a diplomatic effect.
    – Corbin
    Mar 6 at 2:54
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This is in addition to the other answer.

The proponents of relative devaluation of the USD are US industry. For whom it would be a quick boost, by making imported competition more expensive.

But the reasons for the US trade deficit as a whole are deeper and longer lasting. At best it would take a long time for US industry to scale up again. At worst - and this is what conventional macroeconomists say - it is an indirect consequence (via savings = investment) of lower domestic saving rate, which is considered a structural feature of the US economy. To some degree it is also considered a feature of USD being the top global currency (i.e. profits of foreign corps get parked in the US based financial products as the default place to store it, which also helps push up the USD).

Thus, even if there were a cost-free way to make trade partners shift the exchange rate to devalue the USD, it would only slowly (if at all) alleviate the US trade deficit. But it would quickly have the effect of increasing prices, and restarting inflation.

Inflation has two direct effects that are unwanted - 1. Reduced well being of consumers 2. Interest rates rise, making the US government deficit unsustainable beyond a decade or two. In fact this is now happening, although for other reasons. But it would have happened 9 years ago, had advocates of strong exchange rate policy got their way, when article cited in the question was written.

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    The US government deficit is denominated in USD, which the US has the right to print as many of as they feel like. US taking out bonds on to balance spending is just an anti-inflationary measure, sucking up loose liquidity and reducing economic activity to balance the economic activity and liquidity the spending represents. The "unsustainable deficit" is about the viability of the currency, not the ability of the US government to spend USD (even banana republics can spend their own currency willy-nilly; just nobody wants to sell stuff for it).
    – Yakk
    Mar 4 at 15:24
  • @Yakk The US can create dollars to avoid default (so long as Congress is not trying to cause a default for other political reasons). To the extent this or a devalued currency increases inflation, it is likely to lead to the Federal Reserve increasing nominal interest rates above where they otherwise would be. Both higher inflation and higher interest rates can be politically unpopular.
    – Henry
    Mar 6 at 15:40
  • @Henry It's not as simple as that. When economists treat the whole government as one entity, then yes, that entity can create dollars. In reality, one part of the government has deliberately separated itself from another part with the explicit purpose of preventing the first part from being able to print dollars to avoid default, because it was found that governments without this separation would be pressured to constantly print more and more dollars to avoid default, resulting in hyperinflation. A government can default if it chooses to, and this one has chosen to. Mar 6 at 16:43
  • @ReasonablyAgainstGenocide - I am not sure which part of government you are describing here: the legislature (Congress and President) has frequently cut taxes or raised expenditure and the executive has borrowed from the markets to fund the resulting deficit, largely without defaulting though occasionally coming close. The Federal Reserve has on occasion created (more than printed) dollars to stabilise the financial markets though most dollar creation is by commercial banks making loans, and the Fed has at other times raised interest rates in response to high inflation.
    – Henry
    Mar 6 at 18:47
  • @Henry The Federal Reserve is the part which creates dollars and the rest of the government is what needs them. The main part of the government deliberately rid itself of the ability to create dollars precisely so that nobody would be wary that it might print dollars to avoid default in the future. There is one known loophole - it can print fake coins and then insist they're worth trillions of dollars. If it does that, it will destroy the aforementioned separation of powers from the Federal Reserve. Mar 6 at 19:41

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