My Response To Scott Paul On Currency Manipulation

Scott Paul, president of the Alliance for American Manufacturing, thinks that currency manipulation by China and Japan are hurting American workers ("Trade deal lacking regulations on currency will hurt workers," June 10, San Antonio Express-News).

When those countries keep the value of their currencies arbitrarily low, it makes their goods cheaper and makes it harder for U.S. companies to compete. Or so the theory goes.

One problem with this notion is that it can be hard to know the "true" value of a currency. Many factors can affect exchange rates like interest rates, inflation rates, growth rates, national incomes, etc.

Another is that currency manipulation can be risky. You give up revenue on each item sold to get more sales. It is hard for the government to know if this will end up producing more total revenue for the country or not.

Then it also raises the price of imports and hurts its own consumers, some of whom might be producers buying resources from other countries. After all, if the price of your exports is going down, the opposite is happening for imports.

Mr. Paul does not mention any specific policies to address this issue. But some proposals, like Senator Charles Sumer's call for higher tariffs, could end up hurting consumers (and it will probably be the poor who would suffer the most).

As mentioned above imports are not just consumer goods. According to John Murphy, Senior Vice President, International Affairs, for the U.S. Chamber of Commerce, "imports of intermediate goods, raw materials, and capital goods account for approximately 60% of the $2.37 trillion in U.S. goods imports in 2014."

So if any policy on this issue raises the price of imports, it could hurt manufacturing.

Murphy also said "70% of the final retail price of apparel assembled in Asia is created and retained by American innovators, designers, and retailers. In short, there are lots of American jobs behind those imports."

In a related point, Daniel J. Ikenson of the Cato Institute said "the overwhelming majority of trade flows today are intermediate goods, so the effect of currency values on final prices cuts in different directions. That’s why, despite a 38 percent appreciation of the Chinese Renminbi (Yuan) vis-à-vis the dollar between 2005 and 2013, the bilateral U.S. trade deficit with China didn’t decrease, but rather increased by 46 percent."

So even when the value of the Renminbi (Yuan) rises, we still end up with higher deficits. So maybe other factors are much stronger than the value of the currency.

It also is not clear that trade deficits always hurt employment. In the 1990s we had some large ones yet the unemployment rate fell several consecutive years while real wages rose.

Christina Romer, Obama's first chief economic advisor, has said that there is nothing magic about manufacturing and it does not need any special policy. If, for example, we don't have enough jobs, we need to increase aggregate demand, not demand for just one sector.

We all want Americans to have high paying jobs. But it might be hard to preserve those in manufacturing due to long term trends.

Data from the St. Louis Fed shows that as a percentage of all jobs, manufacturing has been on a steady, almost uniform, decline since 1960, long before China started any possible currency manipulation.

What we need is a growing economy with a well trained work force free from too many regulatory burdens. We can't afford to worry about currency manipulation since the cure could be worse than the disease.

http://www.cato.org/publications/commentary/currency-manipulation-trans-pacific-partnership-what-art-laffer-fred

http://www.importswork.com/the-importance-of-imports-to-u-s-manufacturing-2/

https://fredblog.stlouisfed.org/2014/04/the-decline-of-manufacturing/

http://www.mysanantonio.com/opinion/commentary/article/Texas-workers-deserve-trade-pact-with-currency-6317057.php

http://www.nytimes.com/2012/02/05/business/do-manufacturers-need-special-treatment-economic-view.html?_r=0