U.S. Finally Talks Tough on Currency Manipulation

After forty years of watching foreign countries bleed our manufacturing base away, the U.S. is finally starting to talk tough on currency manipulation. A Treasury Department report fingered China, Japan, Korea, Taiwan and Germany as meeting at least two of the three criteria of manipulating their currency for trade advantage over the United States. Expect a call from the 1980s on a rotary dial telephone any minute now over that headline.

Love him or hate him, credit Donald Trump with finally making currency manipulation a bipartisan issue. While some of these efforts had to be in the works for a while, it’s hard to imagine it’s entirely coincidence that he starts publicly shaming China as a currency manipulator and in short order the Treasury Department issues a list of perpetrators.

The really interesting angle is that two U.S. allies are on the list: Japan and Germany. President Obama is friends with both Japan’s Prime Minister Shinzō Abe and Chancellor Angela Merkel of Germany. Including Japan and Germany on the list is the administration’s way of telling China and Taiwan that it’s not personal.

Free Market or Fair Market?

The bipartisan realization seems to be that markets are not truly free unless they’re also fair. For decades the U.S. watched manufacturing jobs flee to countries deliberately manipulating currency for advantage, a trend that’s been going on since the 1970s. In 1988 Congress tried to address that issue with the Foreign Trade and Competitiveness Act that provided the U.S. with tools to address currency manipulation and foreign tariffs. It wasn’t until 1994, during the Clinton administration, that China was finally labeled a currency manipulator.

No Consequences for Manipulators

Even if nations are labeled as currency manipulators the downsides are pretty minimal. Violators would be cut off from some development funds and prevented from getting government contracts. The U.S. would also tattle on them to the IMF. One can almost hear the Chinese leadership’s knees knocking in fear. Meanwhile, the Chinese yuan depreciated another four percent against the dollar last year.

Is Less Bad the Same as Better?

It should be noted that not everyone agrees that China’s recent behavior has been egregious enough to be labeled a currency manipulator. Ever since the IMF agreed to let the yuan become one of the world’s reserve currencies, China has been less of a bad actor on the currency stage. One can still argue the merits of free trade versus fair trade aside from the currency issues, but it should be noted that the yuan has gained ground against the dollar in recent months.

Our Security in Unfriendly Hands

Setting aside purely economic issues, the jobs drain to foreign nations has additional and serious implications. Retaining manufacturing capacity is critical to our nation. Right now we’re completely dependent on foreign nations for almost all of our electronics, including the components that go into our military aircraft and fighting machines. It may cost more to make things here, but once we lose manufacturing capacity it hardly ever comes back. Many of the specialized machines that make components have been shipped overseas, essentially lost forever and under the control of countries that are not our friends.

Even friendly nations like Japan and Germany can’t be allowed to magnify themselves at our expense. It’s past time we should call currency manipulators on the carpet and remind them that our interests count equally with theirs and, if they’re going to cheat on currency valuations, there should be consequences.

There’s a personal responsibility in all this too.  The cash in your wallet is no different from the cash held by the Fed, or the cash and dollar-based assets you’re counting on for your retirement. Just as we shouldn’t cede our national security to China’s whims, you shouldn’t cede your financial security in your senior years to the caprices or deliberate bad acts of other nations.  China may be able to torpedo the buying power of your cash, but no nation can touch the value of your gold, now or in your future.