Combating foreign currency manipulation would boost manufacturing and U.S. jobs

A story in Tuesday’s Wall Street Journal  highlights a truth about the economy that Washington’s policy makers have chosen to ignore. The value of our currency relative to our competitor nations’ currencies is a huge driver of factory location. Despite its positive connotations, a strong dollar is bad for U.S. exports and U.S. manufacturers. For years, Japan bought U.S. treasurys as a way to cheapen its own currency and strengthen ours, just as China does. The result was that Japanese imports to the U.S. were artificially cheaper and Japanese cars built in Japan had a price advantage even overseas, when competing with U.S.-built cars. (The same would be true for refrigerators or construction equipment, or any other manufactured goods.)

But lately, Japan has been unable to prevent its currency from strengthening against the dollar, so much so that the advantage has been flipped, and it is beginning to make more sense for Japanese automakers to build their cars in the U.S. than in Japan. As a result, Nissan is closing plants in Japan and moving lines to Tennessee and Mississippi, and Honda plans to export cars from the U.S. in large numbers—150,000 a year by 2017.

What is true for Japan is true in spades for China, which for years has maintained a weak yuan relative to the dollar. Other countries in Asia have also followed China’s lead. If China let its currency strengthen, products made in China would be much more expensive here, leading many producers to move manufacturing operations back to the U.S. By the same token, products made in the U.S. get an immediate price advantage and would once again be competitive in world markets.

The Obama administration and Congress should agree to legislation that would force China and other Asia currency manipulators to give up their tactics and give our manufacturers a fair chance to compete. As EPI’s senior trade economist Robert Scott has shown, no other single legislative action is likely to create more jobs, do more to correct our trade deficit, or do more for our budget deficit.

  • hansenabcd

    “…a strong dollar is bad for U.S. exports and U.S. manufacturers” I could not agree more fully. “For years, Japan bought U.S. treasurys as a way to cheapen its own currency and strengthen ours, just as China does.” Precisely.

    But given this, why the almost exclusive focus on: “forc[ing] China and other Asia currency manipulators to give up their tactics.” ?

    First, we can’t force China to do anything that China believes would harm
    its economy — like a major appreciation of its currency.

    Second, we are an important part of the problem. China is not manipulating
    its currency by buying treasurys from England, Russia, or Mars. It is by buying them from the United States. We can “force” China to buy fewer US treasurys issuing fewer treasurys. This is something we can control.

    It would be impossible to stop China from buying treasurys as long as treasuries are circulating in the global market. Instead, we would need to
    reduce the sale of treasurys to all foreign borrowers – but not necessarily the total emission of treasurys, as desirable as this may be in the longer term. The remainder can be picked up by domestic investors.

    It is high time we reduce our dependence on foreign borrowing to finance
    government deficits. Since 1970, the share of federal debt held by foreigners has risen from less than 5% to nearly 50%.

    Until the federal deficit is cut significantly — and this is not a good time to do that, we cannot reduce the total debt emission significantly. Given this reality, how can we reduce the sale of treasurys abroad. How can we encourage more private domestic savings by financing more of the federal debt domestically instead of abroad?

    Quite simple, really. Place a small, one-time transactions charge on all purchases of US capital assets by foreign investors. This non-
    discriminatory approach would be consistent with international laws and US
    trade agreements, but by reducing the net after-charge yield, this approach could have a large impact on the purchase by foreign investors of short-term US assets — such as short-term treasurys, while having no significant negative impact on long-term foreign direct investment.

    With this simple mechanism, we could (a) significantly reduce the sale to China and othe Asian countries of US treasurys, their primary tool for currency manipulation, (b) move the US dollar exchange rates to levels
    more consistent with balanced trade, (c) encourage manufacturing and the
    creation of potentially millions of jobs throughout the US economy,
    (d) reduce our dependence on foreign debt and stimulate domestic savings, and (e) reduce the risk that the US government may someday face a crisis
    because foreign creditors are no longer willing to roll over US debts.

    John Hansen