Currency manipulation has not ceased to become a subject of debate among nations in today’s scenario. Such strategies have survived the middle ages and exists even today. It refers to the act taken by governments in order to change the value of their currencies relative to other currencies for some motives. One of the motives for such actions by wealthy nations is to gain an unfair competition advantage in the global trade market. The countries basically manipulate the currencies to make their exports efficaciously cheaper which in return makes imports quite expensive. Instead of leaving the currencies to freely fluctuate, the value of currencies is changed against other currencies by fixing the rate of exchange or changing its value (increasing or decreasing); such changes itself being subject to national policy intervention, which results in global trade imbalance in long run by distorting currency prices. The countries with massive trade deficits often use the term, “currency manipulation” in their political discussion. Foreigners, are accused for their “vile action” when it comes to trade deficits, by the politicians and the citizens of a certain country. However, saving a tiny amount of income and running massive government budget deficit can be the actual reason behind trade deficit.
2. Currency Manipulation & Global Economy
Currency manipulation has severe effects on the global economy. It is accountable for millions of job loss in the United States (US) and Europe. Many scholars have argued that China, being the major currency manipulator, has led to possible threat in the trade market. With the currency being devaluated, the market shares in manufacturing industries of China may increase more and more and that may probably lead to increase in pricing power, which ultimately threatens the jobs around the globe. The industries that are highly export-oriented can be annihilated by unjust strong currency. Many Foreign Direct Investors (FDIs) tend to undertake capital flight due to expected currency manipulation or devaluation of the currency. The countries which are substantial importers can be a subject to inflation. There can be the huge impact in the labor composition as well as in the productivity as the manufacturing sectors mostly engage in trade and bear huge percent of job loss.
3. The Ongoing Debate
Many economists have claimed that China has been manipulating its currency so as to provide negative effects for United States. The Department of Treasury of the United States has stated that China has taken a solid step to devalue its currency in order to gain a competitive advantage in an unfair manner.At the moment, the recent debate is whether or not the other countries are using policies in order to weaken the value of their currency for gaining a trade advantage. Suppose, if some other country devaluates its currency with respect to the dollar, US imports from the country becomes less expensive and the exports to the country becomes more expensive. This result in negative affect to US exports to the country and the producers of import-sensitive goods in US may feel difficult to compete with imports from the country. But it benefits the US consumers who buy imported products and businesses that depend on inputs from other country because the product becomes less expensive.
Japan was immensely condemned for undervaluing its currency during the first decade of 21st century whereas Germany is being accused of currency manipulation because it has largest current account surplus in the world. But the irony is that it does not have its own currency and uses Euro. Also, China was just moving towards the flexible exchange rate and therefore, it was accused of currency manipulation. But several claims have been made that the accusation on China is not true. The United States have also been accusing Brazil and Argentina as currency manipulators to give artificial boost on export of the products. Also, the International Monetary fund (IMF) and the World Trade Organizations (WTO) are not able to take a direct action regarding currency manipulation because the rules of WTO is quite unclear regarding the issue and IMF does not have any sort of jurisdiction to change exchange rate policies of any countries. However, they can impact in an indirect manner.
4. Conclusion / Suggestion
With the ongoing issue of currency manipulation, countries like Nepal, which extremely depend on import, can be benefited when it comes to importing goods. However, Nepal already has pegged currency with India, with whom it trades the most. Article IV of Articles of Agreement of the IMF provides members with general obligations to avoid manipulating exchange rates in international monetary system. Currency Manipulation also violates the Most Favoured Nation principle, the national treatment principle and tariff bindings. However, so as to solve the ongoing issue, WTO and IMF should come together, by rectifying the disconnect between the two, and resolving inherent weaknesses among themselves to bring out clear policies. A new organization can also be formed to monitor currency manipulation which shall be overlooked by the WTO and the IMF. Bilateral or multilateral agreement between countries can also be formed to prevent such manipulations.
Many of the currencies in the world seem undervalued because the US dollar is very strong. So, US dollar being strong, United States is considered to be an amazing place to settle the cash during economic uncertainty in the world. The United States also has inflation-adjusted interest rates which makes the US dollar strong. Foreign money also flows in the banks of US, US stocks are purchased and the investment in real estate is made, which has made the US dollar strong, which essentially might make other currencies undervalued as compared. So, it is difficult to identify whether the countries are actually manipulating the currencies to adjust balance in payment and to gain competitive advantage or is it just the dollar being strong. So, the question arises; is this a trade war?
* The author is a B.B.A. student at College of Applied Business, Kathmandu, Nepal
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