CHAPTER 16

The Truth About Currency Manipulation and a Strong Dollar

Currency manipulation is back in the news. After the Trump administration designated Switzerland, Taiwan, and Vietnam as currency manipulators in 2020, the Biden administration has reversed the decisions, even as Switzerland, Taiwan, and Vietnam met thresholds for the label.

The Treasury Department said that those “three economies met criteria for the manipulator label, including a large trade surplus with the U.S.” But it said that there was “insufficient evidence” to conclude that the three trading partners showed the intent of “preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade to apply the tag.”

The new assessments signal that the Biden administration is taking a less confrontational approach to international currency policy and probably also signals that they are going to be unwilling to do anything about the overvalued dollar. In fact, Treasury Secretary Janet Yellen said, “the value of the dollar should be determined by markets, and the targeting of exchange rates for commercial advantage by other countries was ‘unacceptable’.”

This is a contradiction to President Biden’s promises in his Build Back Better program because trade deficits, currency manipulation, and the strong dollar are economic forces that directly affect the future of American manufacturing and agriculture. Let’s look at why we must face the truth and do something about these issues, regardless of the politics.

Currency Manipulation

The leading cause of U.S. trade deficits is currency manipulation and misalignment by China and 15 other trading countries. Currency manipulation happens when one of our trading partners buys up U.S. assets such as U.S. Treasury notes and bonds, which make the value of the dollar artificially high. By making the dollar more expensive, it makes our exports more expensive and makes the foreign countries’ products cheaper. Currency manipulation is illegal under the rules of the International Monetary Fund and the WTO, but the rules are never enforced.

According to economic theory, running deficits over many years is supposed to weaken our currency and eventually reduce the dollar value and reduce our deficit. The thinking goes like this: A trade deficit creates downward pressure on a country’s currency under a floating exchange rate regime. With a cheaper domestic currency, imports become more expensive in the country with the trade deficit. But it isn’t happening in America. We have been running trade deficits for more than 40 years, and they get worse every year. The trade deficits get worse because our competitors manipulate currencies to keep the dollar value high.

I know that there are guidelines that the Treasury Department uses to define who is a currency manipulator and they go out of their way to not put our trading partners on the list. But if you look at the list of the top 15 countries shown in Table 16.1, the obvious question is why do we run deficits and they all have surpluses and buy American assets so we can finance these deficits. Isn’t this currency manipulation when they do it because they know it will give their exports a price advantage and they know that the United States will do nothing about it. These surplus countries in effect loan us money to pay for our excess of imports over exports, which in effect transfers employment from the United States to other countries.

Table 16.1 Trade deficits with 15 trading partners

Source: U.S. Census Department—Foreign Trade Data.

The government has known about currency manipulation for decades but no politician—Democrat or Republican—has been willing to face the truth and do something about it.

In 2008, President Barack Obama, in a campaign appearance, said that if China continued its currency manipulation, the United States would cut off market access. And when Donald Trump was running for office in 2016, he promised that he would “declare China a currency manipulator” on the first day of his presidency. But when they got into office, nothing happened.

Currency manipulation is by far the most protectionist international economic policy in the 21st century, but, even though it is illegal, neither the U.S. government, the International Monetary Fund, nor the World Trade Organization (WTO) has been willing to really do anything about it.

According to the Economic Policy Institute, “Currency misalignment is the single largest cause of growing U.S. trade deficits. U.S. trade can be rebalanced, creating millions of good manufacturing jobs, by lowering the value of the dollar by about 25 percent.” The failure to end currency misalignment was a major cause of GM’s decision to close five manufacturing plants and outsource production, eliminating 12,000 jobs, and Ford’s plan to reduce its workforce by 12 percent, eliminating 24,000 jobs.

In April 2021, the Biden administration redesignated Vietnam and Switzerland; they were removed from the currency manipulator list and moved to enhanced monitoring list. It appears that no politician, particularly no President, is going to do anything about currency manipulation. I think they fear that it would raise the prices of cheap imported goods, which could lose them votes and jeopardize their reelection.

America’s MNCs also want the status quo. They use their lobbying power and political influence to forestall any attempts to legislate any solutions to currency manipulation and the overvalued dollar. The big importers and companies with plants in Asia benefit from cheap Asian labor and artificial foreign prices and have no interest in changing the current system.

To their credit, the Trump administration tried to stop China from currency manipulation by imposing unilateral trade sanctions under Section 301 of the 1974 trade act. In 2019, they increased the 2018 tariffs on $200 billion in Chinese goods from 10 to 25 percent. But these tariffs only affect China so far, it has not motivated China to come to the negotiating table to discuss currency manipulation or any of their mercantilist cheating tools.

To be fair, I must admit that government has not always ignored the currency manipulation problem. In 1971, Richard Nixon assessed a 10 percent surcharge that coerced our trading partners to raise the value of their currencies. In the 1985 Plaza Accords, President Reagan forced both Japan and Germany to stop manipulation, which resulted in a 30 percent drop in the value of the dollar. Nixon and Reagan proved that the government can successfully intervene on these problems, but since the 1980s, no administration has done anything about currency manipulation or the overvalued dollar.

One of the reasons that foreign countries are so willing to finance our deficit is that American tax law subsidizes it. The Coalition for a Prosperous America (CPA) says that other countries invest in America because they don’t have to pay any taxes on the earnings, and as a bonus, “the American government often avoids reporting the income to their home country tax collector.”

Strong Dollar

The trade deficit is symptomatic of an even greater issue—the dollar’s strength and reserve status. The high value of the dollar since the 1990s has acted like a massive tax on U.S. exports and a huge subsidy to U.S. imports.¹ In the last 10 years, the dollar has risen in value 25.5 percent.² Many of the currency manipulator country’s economies have large economic surpluses which allows them to purchase U.S. securities like corporate bonds, stocks, and U.S. government debt. According to the CPA, in the first 10 months of 2021, capital purchases of U.S. securities were $409 billion. This allows our competitors to both keep the dollar strong, weakening our manufacturing and agriculture sectors, and use the United States as a tax shelter.

According to the London-based nonprofit, the Tax Justice Network, the U.S. ranks second only to the Cayman islands as a tax shelter for foreign investors who want to avoid paying taxes in their own country. ³ According to the U.S Treasury, the U.S. debt to foreigners totaled $21 trillion as of June 2021, and with a goods trade deficit that went over $1 trillion in 2021, nobody seems to worry about how we could pay back this debt.⁴

Politicians and government administrations are especially afraid to address government policy on the value of the dollar. In 1994, the new treasury secretary of the Clinton administration, Robert Rubin, said, “A strong dollar is in our national interest,” because it would assure foreign investors that Washington would not interfere in exchange markets to debase the currency. Rubin, like most treasury secretaries in recent times, was from Wall Street, and Wall Street has more to gain from a strong dollar than any other business or political group.

Since Rubin, every treasury secretary has supported the strong dollar policy. In 2006, Hank Paulson, treasury secretary for George W. Bush, said the benefits of a strong dollar are lower interest rates, more liquid financial markets, cheaper funding for American banks, and the ability to run large trade deficits. In 2010, Treasury Secretary Tim Geithner tabled a report showing that stopping China’s currency manipulation would help create one million U.S. jobs. In the Trump administration, Treasury Secretary Steven Mnuchin admitted that a weak dollar would be good for exports but he didn’t label China a currency manipulator until late in 2019. And in 2021, Treasury Secretary Janet Yellen has fallen in line with all previous Treasury officials and does not want to do anything about the strong dollar or currency manipulation. It appears that anyone coming from the financial sector will always have the same view, which results in an anti-manufacturing policy, and deindustrialization.

Everybody knows that the dollar is overvalued, but there is enormous pressure from many business interests to keep it high. Strong lobbying groups, ranging from retail importers to Wall Street, will spend huge amounts of lobbying money to pressure Congress to maintain the status quo and do nothing about these problems.

A study in 2015 by the Peterson Institute argued that the problems of currency manipulation and currency misalignment are acute. The author says that every 10 percent rise in the dollar value adds $350 billion to the trade deficit and reduces overall economic growth by 1.65 percent with a corresponding job loss of 1.5 million jobs.⁵

A new working paper from the CPA called “Imports Growth and Job Creation from a Competitive Dollar” reveals what could positively result if the dollar value could be reduced. The econometric model is over a six-year period and shows that the dollar price adjustment necessary to achieve a current account balance is a reduction of 27 percent. If the dollar value could be reduced this much, it would result in:

President Biden’s administration promised to “mobilize American manufacturing and innovation to ensure that the future is made in America,” according to Biden’s website. In recent speeches, Biden also says he “plans to build a strong industrial base and small-business-led supply chains to retain and create millions of good-paying union jobs in manufacturing and technology.” These statements, however, are a direct contradiction to his financial policies.

To accomplish any of these goals, Biden will have to actually do something about the trade deficit, currency manipulation, and the strong dollar. A voluntary solution has been tried for decades, but negotiation hasn’t worked because the countries know the United States will not enforce any agreements. Countervailing currency intervention—buying corresponding amounts of a foreign country’s currency to make their currency rise in value—will not work because China and other countries block any purchase of their currency.

Level playing field: When you look at Table 16.2, one wonders how did the United States ever allow all of our trading partners to impose tariffs and VATs against the United States over the last six decades, and did nothing to reciprocate. How did we ever allow the country to get into this jam? We are currently in an unsustainable game we cannot win, as long as we allow our trading partners to make us play on an uneven and unfair field. The time has come for strong enforcement and real penalties.

The United States has nothing to fear by getting tough on trade. We have tremendous leverage because all of these manipulating countries are export dependent, and we have the biggest consumer market in the world that everyone wants to sell to. They need us more than we need them.

Table 16.2 GATT bound tariff rates with 25 countries

Source: Coalition for a prosperous America.⁷

The inconvenient truth is that we will never be able to grow our exports and stop the slow erosion of manufacturing as long as we allow currency manipulation and the dollar to be artificially inflated. We are slowly trading a way our future. I think if we lose the manufacturing sector, we will lose our economic soul.

¹ R. Blecker. June 1, 2003. The Benefits of a Lower Dollar, Economic Policy Institute.

² Based on the Federal Reserve board’s Nominal U.S. Dollar Index (DTWEXBGS).

³ Tax Justice Network, Financial Secrecy Index. 2020. Narrative Report on United States of America, p. 5.

⁴ J. Ferry, CPA. January 3, 2022. Trillion-Dollar Capital Flows Into the U.S. Are Driven By Tax avoidance, Trading, and a Tiny Bit of Real Investment.

⁵ Edited by C. Bergsten. 2016. “Time for a Plaza II in ”International Monetary Cooperation,” Fred and Green Russell A, p. 286–294, Columbia University Press.

⁶ J. Ferry, Chief Economist. February 2019. “Imports Growth and Job Creation From a Competitive Dollar,” Coalition for a Prosperous America, Working Paper.

⁷ C. Benoit. March 22, 2012. “The GATT at 75: Look on My Works, Ye Mighty and Despair,” Coalition for a Prosperous America.