Today’s Jobs Data More Evidence That Currency Manipulation Is Not a Problem That’s Behind Us

Recent debates over the Trans-Pacific Partnership (TPP) have highlighted the failure of the treaty to include a provision to stop countries from actively weakening the value of their own currency in order to run trade surpluses.

The way this currency management works is that countries (most notably China, though there are many others as well) buy assets denominated in dollars—mostly U.S. Treasuries. This boosts the demand for dollars in global markets and weakens demand for the Chinese renminbi. This in turn increases the value of the dollar, which makes U.S. exports expensive in global markets and makes foreign imports cheaper to U.S. consumers. The result is that exports are suppressed while imports grow and the U.S. trade deficit widens.

Opponents of including a currency provision in the TPP have made a number of bad arguments, and one of them is that currency management was once a problem, but isn’t anymore. They often point to recent appreciation of the Chinese currency as evidence that the problem of currency management is behind us. But this is incorrect—the evidence that currency management is still a problem is simply that foreign purchases of dollar-denominated assets remained strong in 2014. There is zero doubt that absent this continued intervention, the U.S. dollar would weaken. Further, the nearly $1 trillion in purchases of dollar denominated assets that has characterized each year since 2008 has led to a large stock of dollar assets held by foreign investors and governments, and this large stock (over and above the annual flow of dollar purchases) also keeps the value of the dollar stronger than it would otherwise be.

Further, two pieces of recent evidence suggest strongly that excess dollar strength could be becoming a real drag on recovery. In the first quarter numbers on gross domestic product, the rising trade deficit knocked 1.3 percentage points off the economy’s annualized growth rate. Then trade data for March came in showing a very large rise in the deficit. Finally, today’s jobs report shows that growth of employment in manufacturing has stagnated in the last quarter (rising at an average monthly rate of less than 2,000 jobs), after rising at an average monthly rate of 18,000 in 2014.