Does China’s currency manipulation hurt the US?

Hillary Clinton, John Kasich, Marco Rubio, Bernie Sanders, Donald Trump and other American politicians accuse the Chinese government of currency manipulation—that is, of keeping the exchange rate for its currency artificially low.

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As the charts indicate, this does not seem to be supported by the facts.  Notice that although the lines in the two charts are going in opposition direction, they both indicate that, over time, it takes fewer yuan to buy a dollar.  In other words, the value of the yuan over time is rising, not falling.

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Even if China was manipulating its currency in a nefarious way, I think it is futile for the U.S. government to demand that foreign countries act against their own perceived self-interest.

It is within Washington’s power to devalue the dollar, and there are reasons why this is not done.

Much of the world’s business is done in dollars.  This includes world oil sales.  Most of these dollars pass through American banks.

This is a source of Wall Street’s power and also Washington’s power.  It is why economic sanctions are so powerful a weapon of American foreign policy.  It is hard for foreign countries to avoid dealing with the United States and American banks.  As a debtor nation, the United States would not have nearly so much economic power otherwise.

Washington doesn’t want a cheaper dollar.  That could mean the dollar would cease to be the currency in which international trade is conducted.

A falling exchange rate for the dollar would be bad for the banking industry because fewer foreigners would do business in dollars.

It would be bad for the U.S. government and taxpayers because interest on the national debt would be higher, to compensate bond-holders for perceived risk in being paid in dollars.

Most importantly, it would be bad for American consumers because we would be paying higher prices.

The benefit to American manufacturing industry from a cheaper currency in such a case would be slow in coming, and might never come.  We Americans have a worse problem than in the Great Depression of the 1930s, when President Roosevelt experimented with ways to jump-start American industry.  Today we Americans have to rebuild and repair our industrial capacity before we can re-start it.

While letting national currencies fluctuate helps bring trade into balance, I don’t think this is the key to a more favorable balance of trade.  Unstable currencies create dangers, which are made worse by currency speculators such as George Soros.  A government should protect the value of its currency in the short run while letting it move toward a better balance in the long run.

Chinese policy, as I understand it, seems very prudent.  It lets its currency trade on world markets within a narrow band.  The next day it resets the center of the band, at wherever the exchange rate was at the end of trading the day before.  In that way, the Chinese avoid any big swings in trade or prices, yet they allow exchange rates to move in the direction that the market indicates.

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One Response to “Does China’s currency manipulation hurt the US?”

  1. sglover Says:

    Is it really the strength of the dollar that gives Washington outsize economic clout, or its relative stability? For instance, hasn’t the value of the euro fluctuated in part because of skittishness toward ECB and EU policy?

    Like

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