Currency Manipulation: The Real Story vs. House of Cards

The second installment of the Netflix original series, House of Cards, became available recently to the delight of binge watchers everywhere. In the backdrop of Frank Underwood’s (played by Kevin Spacey) uncompromising assent to power is a very relevant debate about trade policy with China. Specifically, one of the primary sources of tension between the two countries is the U.S.’ contention that China artificially keeps the value of their currency down to gain an advantage in trade. Defining currency manipulation is an ongoing debate, but Bergsten and Gagnon laid out their own criterion and found China to be one of the “most significant currency manipulators.” The effort to label China a currency manipulator falls by the wayside in Underwood’s duplicitous schemes to push his own personal agenda, but China’s currency manipulation has real effects on trade, and the United States can take real actions to reduce the trade deficit and create jobs. In fact, EPI’s Robert Scott just released a paper which found that ending currency manipulation across 20 of the most prominent practitioners (including the linchpin, China) would create between 2.3 million to 5.8 million jobs in the United States over the next three years.

So how is “currency manipulation” defined?  Bergsten and Gagnon categorize a country as a currency manipulator if it meets the following four criteria:

  • They held federal exchange (FX) reserves that exceed six months of goods and services imports.
  • They maintained a total (global) current-account surplus between 2001 and 2011.
  • Their total FX reserves grew faster than their GDP between 2001 and 2011.
  • They have gross national income in 2010 of at least $3,000 per capita, the median among 215 countries ranked by the World Bank (this criterion excludes low-incoming developing economies).

FX reserves, or the purchases of foreign assets by central banks, are the primary determinant in currency manipulation because these countries’ central banks use them to “maintain exchange rate pegs by buying and selling currency in international markets, or ‘intervening’ in FX markets”. China’s global current-account surplus and total FX reserves far exceed those of other currency manipulators, due in part to the size of its economy. As shown in Figure A, China has been generally increasing its FX purchases since 2001.

By keeping the value of their currency lower than it would otherwise be, currency manipulators artificially make their exports relatively cheaper, thus putting U.S. exporting industries at a competitive disadvantage. Between the Great Recession and a slowdown of FX purchases by China between 2011 and 2012, China’s global current account balance, the broadest measure of the overall balance of a country’s trade in goods, services, and other income, and outflows. has fallen in recent years, and China’s currency has been allowed to appreciate somewhat over recent years. But the International Monetary Fund’s projections for China’s current account balance in coming years in Figure B demonstrate that these recent trends will not likely continue, and that a more fundamental re-adjustment of China’s currency is needed. Early indications are that the IMF is right on this score, as China returned to its substantial purchases of FX reserves in 2013.

Scott estimates that between $200 billion to $500 billion of the U.S. trade deficit was caused by this currency manipulation in 2011. If we were to address currency manipulation , Scott projects that the U.S. trade deficit would decline by $200 billion to $500 billion by 2015. As U.S. exports become more competitive, American industries can grow and hire more employees. Scott’s model also accounts for indirect jobs (jobs created from supplier industries, i.e. car parts for vehicle manufacturing) and respending jobs (jobs created from the increased wages of direct and indirect jobs created). Scott projects that this could expect to create between 2.3 million and 5.8 million jobs. The majority of these job gains would occur in manufacturing (891,500 jobs in the 2.3 million scenario, and 2,337,300 jobs in the 5.8 million scenario).

What can we do to bring about these changes? Three things:

  1. Congress should pass pending legislation (H.R. 1276 and S. 1114) that would allow the Commerce Department to treat currency manipulation as a subsidy in the Countervailing Duty trade cases (nearly identical legislation was passed by large majorities in the last three years but never enacted).
  2. As a majority of the House has insisted, the proposed Trans-Pacific Partnership (TPP) trade agreement should include “strong, enforceable currency manipulation provisions.”
  3. The administration must implement strategies that would tax and/or offset purchases of foreign assets by currency manipulating governments, which would make efforts to manipulate the dollar and other currencies costly and/or futile.

Senator Sherrod Brown (D-Ohio) and Representative Sandy Levin (D-Mich.) have both highlighted the importance of addressing currency manipulation in boosting export and employment growth, participating in a conference call (listen here) with Robert Scott and Scott Paul, President of the Alliance for American Manufacturing. Both Congress and the Obama administration need to act in order to curb currency manipulation so that American industries can compete on a level playing field with their competitors in other countries.

So while Frank Underwood used the currency manipulation issue as a tool in his personal pursuit of power, the real Congress and the Obama administration can address currency manipulation to yield job gains for U.S. workers.


  • Mike Fellman

    I actually am not sure if currency manipulation is the problem that many US companies believe it to be. US imports from China are largely pro-cyclical, rising when consumers and households are spending. The Yuan has been appreciating steadily since 2010 as per a deal struck by the Obama administration. Imports from China has also risen steadily as the economy has healed. Your own figure shows a rising current account balance for China despite a 20 percent appreciation of the Yuan.

    In the new economy, it makes more sense to service foreign demand by placing factories abroad. When GM builds a plant in China to sell to the Chinese, it creates both Yuan denominated assets and Yuan denominated liabilities. This creates a natural hedge against exchange rate fluctuations and lets GM focus on making cars rather than worry about FX trading.

    The overall decline of US manufacturing in the 2000s remains a puzzle. A sharp depreciation in the US dollar over that time period vis-a-vis the Euro, Sterling, and other major currencies should have made US exports more competitive. Instead the exact opposite happened, the US current account deficit soared as households gorged on cheap debt, peaking at 6.0 percent of GDP in 2006.

    Finally, I am not sure if cheap labor from China or other emerging markets explains why US manufacturing declined. Japan and South Korea remained export powerhouses over this time period, and to this day. Lots more complicated issues to examine…