The question is unavoidable in the wake of a new report by Joseph Gagnon of the Peterson Institute entitled “Combating Widespread Currency Manipulation.” The headline finding is that countries seeking to hold down the value of their currencies now distort global capital flows to the tune of $1.5 trillion a year. The result, says Gagnon, a former economist at the Federal Reserve, is a “net drain on aggregate demand in the United States and the euro area by an amount roughly equal to the large output gaps” in these nations. Bottom line: “Currency manipulation is responsible for millions of lost jobs in the United States.”
Gagnon’s data shows that while some surprising countries (such as Denmark and Switzerland) are rigging exchange rates, China’s scale makes it the 800-pound panda here.
Worse, both parties have caved for years in the face of China’s bare-faced mercantilism — thanks to risk aversion and negotiating incompetence that have betrayed American workers. That’s the case made by H.W. Brock in an important yet underappreciated book published this year: “American Gridlock: Why The Right And Left Are Both Wrong.”
Brock, who runs the advisory firm Strategic Economic Decisions, says the first thing to understand is that China’s willingness to let the yuan appreciate by nearly 30 percent since 2005 does not mean (as the IMF declared Tuesday) that the problem has essentially been solved. We need to take a longer view.
As Brock shows, the yuan “is worth well under half what it was worth when the Chinese economy was in shambles as late as the early 1980s.” Between 1990 and 2011, moreover, the yuan depreciated by 46 percent versus the dollar. This is the opposite of what you’d expect in a booming developing nation that’s drawing overseas investors who lift demand for its currency (and the opposite of what happened to the yen as Japan rose, for example).
Brock reckons that the yuan’s value in dollar terms is arguably one-sixth of what it should be. He calls Washington’s failure to do anything about it a “political disgrace.” In his view, we should have conditioned China’s entry into the World Trade Organization a decade ago on a phaseout (over five years, say) of the country’s currency games, IP theft and related practices. If China failed to comply, we and the world should have imposed punitive tariffs.
Instead, by letting China rig the game, Brock argues, we’ve let slip priceless intellectual property and become a huge net debtor. What’s more, by letting the currency issue fester unaddressed for so long, we’ve encouraged multinational supply chains to become so dependent on Chinese operations that steep tariffs now would not only hurt China but the West as well.