Q. What is currency manipulation?
A. Currency manipulation is when a government intervenes in the market to artificially maintain the value of its currency. A government that does this can make its exports cost less in foreign markets, and make imports cost more in its home market. The result is an unfair advantage among international trading partners.
For example, if a country sets its exchange rate at six units of its currency for one U.S. dollar, when the open market would set five units per dollar, the country gains an advantage. Using these exchange rates a toaster that costs 200 units of that country’s currency would cost $40 in the United States at an exchange rate of 5 units to the dollar, but only $33.33 at a rate of 6 units to the dollar. A U.S.-made toaster that costs $35 would cost 175 units with an exchange rate of 5 units to the dollar, and a whopping 210 units with an exchange rate of 6 units to the dollar.
Q. Do any U.S. trading partners manipulate their currency?
A. I agree with many others that China manipulates the value of its currency. The Chinese government has intervened in the market to keep its currency undervalued, and the result is a significant advantage in foreign markets for Chinese exports and a significant disadvantage to U.S. and other foreign exporters who want to sell their goods and services in China. Many Iowa businesses, particularly in the agricultural and manufacturing industries, depend on their ability to export goods to China. Currency manipulation by the Chinese government hurts these businesses and their employees. On American farms, one out of every three acres is planted for export, and agricultural exports account for one quarter of farm cash receipts. Likewise, approximately one out of every three tractors produced in John Deere’s Waterloo, Iowa plant is sold to customers in export markets. These businesses need international trade to employ Iowa workers.
By law, the U.S. Treasury Department is required to name any country it suspects of manipulating the value of its currency to gain an unfair advantage in international trade. Although the most recent version of the Treasury Department’s report on “International Economic and Exchange Rate Policies” was due to Congress on April 15, Treasury Secretary Geithner decided to delay the report’s publication in order to provide more time to discuss the issue with China. That was a mistake. Everyone knows China is manipulating the value of its currency to gain an unfair advantage in international trade, and it’s time to say so publicly.
I also think it’s time for the Obama Administration to begin preparing a case against China’s currency manipulation in the World Trade Organization. China derives great benefits from our open system of international trade. With those benefits comes the responsibility to adhere to the norms expected of a major economy, including with respect to exchange rates. If China is not willing to live up to its obligations, the United States needs to challenge that behavior under the international rule of law.