The Case Against Currency-Manipulating Aggressors – Part One

A hard-hitting article in the FT by Fred Bergsten and Joseph Gagnon, the director of and a senior fellow at the Peterson Institute for International Economics, respectively, pulls no punches in laying out the case for action against those come to be termed “currency aggressors.”

The article states that by artificially manipulating the value of their currency relative to others, currency aggressors exhibit rapidly growing levels of foreign currency reserves as well as significant current-account surpluses.

They buy US dollars and euros to suppress the value of their own currencies, keeping the price of their exports down and the cost of their imports up. Thus they subsidize exports and tax imports, enabling them to maintain or increase trade surpluses and pile up foreign exchange reserves.

These tactics, in effect, export unemployment to the rest of the world.

Brazil probably coined the term “currency wars” in recent years as they riled against the rapid rise of their own real relative to China’s currency and that of other nations, and many in the US have long argued China has been artificially suppressing the value of the yuan relative to the US dollar to the detriment of US jobs and balance of payments.

But the authors go way beyond these cases and suggest China has largely curtailed its actions of late, allowing the yuan to gradually appreciate against the US dollar.

The list of countries extends well beyond the original target of China. Broadly, three groups are, in the writer’s opinion, guilty of significant currency manipulation.

The first group is other Asian countries apart from China, including Japan, Singapore, Taiwan, Korea, Hong Kong, Thailand and Malaysia. Second are major oil exporters, including the United Arab Emirates, Russia, Norway, Saudi Arabia, Kuwait and Algeria. Third are rich countries near and in the Euro-zone, most notably Switzerland but also Denmark and even Israel.

In an effort to quantify the impact, the authors estimate that if all currency intervention were to cease, the US trade deficit would fall by $150-$300 billion, or 1-2 percent of gross domestic product. Furthermore, between 1-2 million jobs would be created, as, over time, jobs returned to the US from overseas.

The Euro-zone would gain by a lesser but still substantial amount.

Continued later in Part Two.