In the recent Op-ed column of the New York Times, Jared Bernstein argues the Trans-Pacific Partnership (TPP) should include a chapter on currency manipulation. He names some Asian countries including China and Japan as “currency managers”, insisting attempts made by these countries are subsidizing their exports and taxing their imports, which results in persistent trade deficits in the United States. In response to this situation, he suggests first to define what currency management looks like, then to agree on specific retaliation measures for currency managers including tax on the imports of offending countries, fines, and the temporary canceling of certain trade privileges.
Needless to say, there are plenty of examples of “currency management” he refers to, ranging from some developed economies like Japan and Euro area (although they haven’t embarked on quantitative easing policy yet, their intension of depreciating the Euro is clear), and many developing economies including China, Singapore and Malaysia. Still, I think there are at least three questions Bernstein and the US policymakers have to answer before they include a chapter on currency manipulation.
- How do they differentiate currency management from accumulating foreign reserves for other purposes?
As Bernstein himself noted, countries buy foreign currencies for various reasons. And other than currency management, one of those motivations is to have foreign reserves as an “insurance” for sudden capital outflows from country. One can immediately think of the recent currency collapse in Russia as an example of this kind of event and one can also imagine that having ample foreign reserve is really important when it happens. Since it is very difficult to predict how big an impact of capital outflow would be, countries (especially emerging economies with relatively volatile domestic currency fluctuations) have an incentive to purchase enough foreign currencies for a rainy day. Can any policymakers define reasonable level of foreign reserve which prevent future currency crisis? I’m rather skeptical about it.
- Is purchase of foreign currencies made by central bank a good definition of currency management?
Bernstein argues that weather the central bank is buying foreign currencies or not is a clear test of currency management. But there are other ways to lower domestic currency, again as Bernstein himself points out. Specifically, central bank can attempt to depreciate domestic currency by monetary easing (either by lowering short-term interest rate or implementing unconventional policies like quantitative easing). Since majority of people agree that either purchase of foreign currencies or monetary easing can achieve lowering domestic currency, I don’t really see why only the first one should be the “clear test” of currency management.
- Is the Chinese currency still undervalued?
When it comes to the Chinese currency, too many people just assume it is still way undervalued than it should be. Before criticizing China as a currency manipulator, it is important to show evidences for this. In fact, some researchers say that Chinese currency is not undervalued anymore by using the new purchasing power parity (PPP) calculation. While some other institutions like IMF reported that the yuan is “moderately” undervalued, it is almost clear that Chinese currency is heading to the right direction given that China’s current account surplus is now just 2 percent of its GDP (10.1 percent in 2007).
My conclusion is: unless at least those three questions are answered, other countries would think that Bernstein’s argument is rather one-sided even if both parties in the US congress agree with it.