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5 The US as leading currency
manipulator By Henry C K Liu
For decades, the United States, a
self-professed evangelist for free trade, has been
paranoid about other nations manipulating the
exchange value of their currencies for trade
advantage with counterproductive distortions in
global free trade. Such apprehension has even been
institutionalized into law.
Section 3004
of Public Law 100-418 (22 USC 5304) requires,
inter alia, the secretary of the Treasury
to analyze annually the exchange-rate policies of
foreign countries, in consultation with the
International Monetary Fund (IMF), and to consider whether
countries manipulate the
rate of exchange between their currency and the US
dollar for purposes of preventing effective
balance-of-payments adjustment or gaining unfair
competitive advantage in international trade.
Section 3004 further requires that if the
secretary considers such manipulation occurring in
countries, such as Japan and China, that (1) have
material global current-account surpluses and (2)
have significant bilateral trade surpluses with
the US, the secretary of the Treasury shall take
action to initiate negotiations with such foreign
countries on an expedited basis, in the IMF or
bilaterally, for the purpose of ensuring that such
countries regularly and promptly adjust the rate
of exchange between their currencies and the
dollar to permit effective balance of payment
adjustments and to eliminate any unfair advantage.
Section 3005 (22 USC 5305) requires,
inter alia, the secretary of the Treasury
to provide each six months a report on
international economic policy, including
exchange-rate policy. The reports are to contain
the results of negotiations conducted pursuant to
Section 3004. Each of these reports bears the
title "Report to Congress on International
Economic and Exchange Rate Policies".
Unfortunately, the underlying implication
of the law assumes erroneously that
current-account surpluses can be by themselves
evidence of currency manipulation by the surplus
country. In fact, as trade imbalances are the
structural effects of fundamentals in the terms of
trade, attempts to correct them with exchange-rate
adjustments are by definition currency
manipulation.
Exchange-rate policies
cannot be substitutes for structural economic
adjustments necessary for mutually beneficial
trade between two economies. Nor can exchange-rate
policies be substitutes for sound domestic
monetary or economic policy. When two economies
are at uneven stages of development trade, a trade
surplus in favor of the less developed economy is
natural and just until the less developed economy
catches up with the more developed one. Otherwise
it would be imperialistic exploitation, not trade.
A protectionist nation in free-trade
clothing That the United States, by its
unilateral trade policies, has really been a
nation of protectionists in free-trader clothing
was again highlighted by a hearing of the Senate
Committee on Banking, Housing, and Urban Affair on
January 31 headed by its new chairman, Senator
Christopher J Dodd, whose Democratic Party won
control of the Congress in last year's mid-term
elections. The hearing was on the Treasury
Department's Report to Congress on International
Economic and Exchange Rate Policy and the US-China
Strategic Economic Dialogue. Hank Paulson, the
74th treasury secretary of the nation, was the
lead witness.
The target of the hearing
was China, which has replaced Japan in recent
years in the eyes of the US as prime suspect of
being the world's leading currency manipulator.
Yet as Stanford economist Ronald McKinnon argues
in an April 24, 2006, op-ed piece in the Wall
Street Journal, China's motivation for pegging the
yuan is to secure monetary stability rather than
achieve an undue mercantile advantage in world
export markets. He pointed out that persistent
Chinese trade surpluses and US trade deficits
reflect mismatches in saving in China and the US,
an imbalance that exchange-rate changes might mask
but cannot correct. McKinnon concluded, "China is
not a currency manipulator, and the yuan/dollar
rate is best left more or less where it is."
The twice-yearly high-level US-China
Strategic Economic Dialogue is a brainchild of the
new treasury secretary. The first meeting, headed
on the US side by Paulson, with the participation
of Federal Reserve Board chairman Ben Bernanke and
several other cabinet secretaries, and on the
China side by State Counselor Wu Yi, supported by
Chinese counterparts of US officials, was held in
Beijing last December, with the second meeting
scheduled to take place in Washington in May.
The Senate Banking Committee, pursuant to
statute, annually receives exchange-rate reports
from the Treasury, taking testimony from the
sitting treasury secretary, and exercises
oversight on government exchange-rate policy,
which has become of critical concern for US
businesses and workers who seek a "level playing
field" to compete in global markets. The Treasury
Report is the only report to Congress that
directly addresses international economics,
exchange-rate policy, and currency manipulation by
other national governments. Testimony from the
treasury secretary to Congress, if requested, is
required by law.
In his opening statement
as committee chairman at the January 31 hearing,
Senator Dodd expressed dissatisfaction with US
government policy for its "inability to secure
opportunity and prosperity for working Americans".
Policies put in place by the administration of
President George W Bush well before the
appointment of Secretary Paulson have turned
record surpluses left by the previous
administration of president Bill Clinton into
record deficits, leading to under-investment in
important national priorities, such as health
care, schools, infrastructure and targeted tax
relief for threatened businesses and struggling
working families, even as the nation fell deeper
in debt, while producing growth only to select
economic sectors such as financial services and
prosperity only to the rich segment of the
population.
Median family annual income
has declined by nearly US$1,300 over recent years
as income disparity widens. More than 3 million US
manufacturing jobs have been lost since 2001, the
steepest and most prolonged loss since the Great
Depression. The current US economic recovery is
the first in which manufacturing jobs lost have
not returned. Dodd decried the fact that "for
millions of Americans, the recession has not
ended, but goes on and on", and has done so for
more than seven years. The statement was a fair
summation of neo-populist sentiments against the
adverse domestic effects of two decades of
globalization.
Yet the Democratic senator
is only half right. While American workers have
lost jobs, the US economy has not really lost
these jobs, only relocated them. The US economy
has merely expanded globally and moved jobs
overseas to take advantage of low-wage workers in
the employ of US capital, in what economists call
cross-border wage arbitrage.
Economic
imperialism in the age of industrial capitalism
provided employment at the core to produce exports
to the colonies to earn gold for the home economy.
Neo-imperialism in the age of finance capitalism
relocates jobs to the periphery and imports
products manufactured by low-wage labor paid for
with fiat currency (paper money) issued at the
core, the surplus of which can only be
reinvestment in the issuing economy. Dollar
hegemony emerged as the US dollar, a fiat currency
since 1971 when president Richard Nixon took it
off gold. The dollar continues to assume the role
of prime reserve currency for international trade,
anchored by transactions in key commodities such
as oil being denominated in dollars. US
neo-imperialism is intermediated financially by
dollar hegemony.
A selective level
playing field Cross-border wage arbitrage
is a subset of financial arbitrage in which
investments are made in low-cost countries to
produce goods for sale in high-income countries.
Interest-rate arbitrage is another subset in which
funds are borrowed in low-interest currencies to
lend in high-interest currencies, a routine
transaction known as "carry trade" in
international banking parlance. The complaints
about cross-border wage arbitrage by the US, a
clear beneficiary of global finance arbitrage,
amount to blatant selectivity in its professed
commitment for a "level playing field".
What Senator Dodd leaves unspoken is that
the old slogan "what's good for General Motors is
good for America" has been
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