What is "Currency Manipulation"?
If you walk through the U.S. Congress right now, you'll hear a lot of Senators and Members of Congress talking about "currency manipulation." Specifically, currency manipulation on the part of China.
But what exactly is this currency manipulation problem?
Starting in 1994, China began to explicitly peg its currency, the yuan, to the dollar at a set, low rate. No matter if the dollar rises or falls, the Yuan remains in place with the dollar. And since the Chinese economy has been growing faster than the U.S. economy, the result is that the yuan has remained significantly undervalued. This makes China’s exports to the U.S. relatively cheaper than they should be and also makes U.S. exports to China more expensive.
The main consequence is that a flood of artificially cheap Chinese imports has driven many domestic U.S. manufacturers out of business. In fact, the U.S. trade deficit with China has risen from $30 billion in 1994 to as high as $268 billion in 2008. China's policy of currency manipulation is intentional, and has helped it become the world's leading exporter.
But along the way, it has also earned the ire of the EU, Japan, and the WTO for continuing what is essentially an illegal practice. As long as China's currency remains significantly undervalued, Beijing will continue to enjoy sizeable exporting benefits. Unfortunately, the repercussions of this are a growing distortion in world markets.
And so we come to the present moment-- with five U.S. senators, including Charles Schumer of New York and Lindsey Graham of South Carolina, introducing legislation to make it easier for the U.S. to declare currency misalignment and take corrective action. Even if their legislation stalls, this new Senate pressure may compel the U.S. Treasury Department to declare China a currency manipulator in its next semi-annual report.
Such a move would initiate a federal response -- something that U.S. manufacturers desperately need.
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