It seems like a long time ago now, but last month, just before the dawning of the P.C. (pre-coronavirus) era in the United States, President Donald Trump announced that he no longer considered China a currency manipulator.
Frankly, China’s reputation as a currency manipulator was mostly a “trumped” up charge (pun intended).
Before I go any further, let me emphasize that I’m not trying to pooh-pooh or minimize the economic threat that China poses. China’s policies have been aggressively predatory toward the United States and the rest of the world. China’s malfeasance includes theft, extortion, cheating on trade agreements, and massive mercantilist policies designed to weaken and destroy foreign competitors—all in its ruthless drive for global economic dominance.
Technically, yes, China has been a currency manipulator. Some degree of currency manipulation is virtually a given with fiat currencies, and since every country today uses fiat currencies, monetary authorities seek to position their currencies favorably in relation to other currencies. Back in the days of a gold standard, an ounce of gold was an ounce of gold, and it was pretty hard to manipulate that objective reality. Those days are long gone. Fiat currencies, by contrast, aren’t based on any objective reality, and so by their very nature they’re susceptible to official manipulation in pursuit of various policy goals.
So, to what extent has China manipulated the exchange value of their yuan (renminbi)? Over the 20-year period from the last day of 1999 through the last day of 2019, the yuan did not, in fact, depreciate against the dollar. It actually appreciated 19.0 percent against the greenback. By comparison, the British pound depreciated 17.9 percent against the dollar over the same period of time. Are the Brits, then, sinister currency manipulators that we should avoid entering into a trade agreement with, now that they are newly liberated from the E.U. bureaucracy? Hardly.
There were, in fact, some fluctuations in the yuan/dollar exchange rate during the previous two decades. You may recall the brouhaha that erupted in 2015 when the Chinese monetary authorities suddenly allowed the yuan to fall 3.1 percent against the dollar in just a few days. In a meeting with some business leaders and a congressman at the time, I urged calm, pointing out that the currencies of two of our other leading trade partners—the E.U. and Canada—had fallen 17 or 18 percent against the buck that year, yet nobody uttered a peep about that being an unfair trade practice.
In fact, earlier in 2015 China had spent almost a quarter of a trillion dollars to prop up the exchange value of the yuan. Given those facts, singling out China as a currency manipulator was quite a stretch. It’s true that the trade deficit with China was expanding rapidly, but currency manipulation wasn’t the culprit.
Another notable episode in the history of the dollar–yuan exchange rate was that the yuan strengthened 21 percent against the dollar from July 2005 to July 2008. A change of that magnitude surely must have shrunk the U.S. trade deficit with China noticeably, right? Nope. During those three years, the U.S. annual trade deficit with China rose from $202 billion to $268 billion with American imports from China increasing by 39 percent during that period. That blows some major holes in the dogma that a weaker dollar will reduce imports and trade deficits.
Sometimes we hear it said that the United States needs a weaker dollar. Don’t be so sure about that. A strong currency has benefits both on a national and individual level. For example, when the yen appreciated more than threefold against the dollar, Japan was able to import oil (which is priced globally in U.S. dollars) for less than one-third the number of dollars that it had to pay when the yen was worth fewer dollars.
The same dynamic plays out for individuals, too. Ask yourself: Are you better off with a stronger or weaker dollar? In other words, would you prefer to have each of your dollars buy a lot or a little? Silly question, isn’t it?
I first learned the advantage of a strong dollar when I lived in Colombia, South America, as a 19-year-old. When I first got there, I could exchange one U.S. dollar for 16 Colombian pesos. Four months later, I could get about 22 pesos per dollar. At that exchange rate, I could buy a steak dinner and a beer in a nice restaurant on Carrera Séptima, Bogotá’s main thoroughfare, for the equivalent of one dollar. For an impecunious college kid, that was a real treat!
[Side note: Out of curiosity, I decided to check the current exchange rate between the dollar and the Colombian peso. Today, one U.S. dollar gets you 3,456 Colombian pesos. I feel sorry for the Colombians.]
A strong currency is a consumer’s best friend. The notion that the Federal Reserve should weaken the dollar to make things more expensive for Americans to buy, but cheaper for foreigners to buy, makes no sense. We are a long way away from having enough fiscal self-control to make a gold standard viable, but in the absence of such a natural market-based currency, let’s hope that American monetary policymakers don’t fixate on the fallacy that they'll help us by manipulating the purchasing power of our currency lower.
