A truly excellent article.
Excerpts
On currency manipulation:
The US treasury has been charged by Congress to assess whether China is a “currency manipulator”. Although President Barack Obama has now delayed for some months when the treasury secretary, Timothy Geithner, must issue his report, the very concept of “currency manipulation” itself is flawed: all governments take actions that directly or indirectly affect the exchange rate. Reckless budget deficits can lead to a weak currency; so can low interest rates. Until the recent crisis in Greece, the US benefited from a weak dollar/euro exchange rate. Should Europeans have accused the US of “manipulating” the exchange rate to expand exports at its expense?
On exchange rates and surpluses:
In a global economy with deficient aggregate demand, current-account surpluses are a problem. But China’s current-account surplus is actually less than the combined figure for Japan and Germany; as a percentage of GDP, it is 5%, compared with Germany’s 5.2%.
Many factors other than exchange rates affect a country’s trade balance. A key determinant is national savings. The US’s multilateral trade deficit will not be significantly narrowed until it saves significantly more; while the recession induced higher household savings (which were near zero), this has been more than offset by the increased government deficits.
Adjustment in the exchange rate is likely simply to shift to where America buys its textiles and apparel – from Bangladesh or Sri Lanka, rather than China. Meanwhile, an increase in the exchange rate is likely to contribute to inequality in China, as its poor farmers face increasing competition from America’s highly subsidised farms. This is the real trade distortion in the global economy – one in which millions of poor people in developing countries are hurt as America helps some of the world’s richest farmers.
A must read.