The battle rages.

• Author: Scissors, Derek
• Position: Letters to the Editor - Letter to the editor

AEI Resident Scholar Derek Scissors takes issue with Greg Mastel's views on currency and trade and Chi Lo's outlook on the prospects for Chinese economic reform in TIE!? last issue. Mastel and Lo respond.

BOTH ARE WRONG

Trade analyst Greg Mastel characterizes "currency manipulation" as the largest trade impediment facing the United States and offers a new policy option. The policy option is thoughtfully crafted but his view that currency manipulation is America's biggest trade impediment is very hard to support.

Most protectionist arguments cite a trade deficit as intrinsically harmful, which is itself an error. It is particularly odd when currency critics--Mastel is part of a large group--focus on trade deficits, since the exchange rate is tenuously linked to merchandise trade balances in the high-profile cases of Japan and China.

The main reason to emphasize currency in Transpacific Partnership (TPP) talks is to bind Japan. But Japan is now running arguably its largest merchandise trade deficits in the post-war era. The bilateral U.S.-Japan deficit, which is less informative than the aggregate balance, also shrank in 2013. These deficits developed almost immediately after the yen's decline against the dollar in late 2012.

Japan is an older society, producing less for export. It is likely to run goods trade deficits, or small surpluses, for years to come. If such balances matter, no restriction on Japan is required. On a charitable view, calls for a TPP currency chapter are a means to coerce Japan into eliminating non-tariff barriers, which is the true problem the United States faces in bilateral trade.

The currency saga now focuses on China. However, the link between the yuan and China's still-large trade surplus is unclear.

From 1998 to 2004, the yuan was fixed and China's goods trade surplus declined. The jump in the surplus--more than tripling--occurred in 2005, the same year Beijing set the yuan on a very slow climb. The surplus rises sharply through 2008, while the yuan edges higher. With regard to the bilateral deficit in goods, it rises by more than half from 2005 to 2013, even as the yuan rises by over 30 percent against the dollar. The exchange rate again does not drive the trade balance.

One response is to claim currency manipulation costs American jobs. Mastel cites a Peterson Institute study arguing currency policies cost between one and five million U.S. jobs. First, the huge range involved suggests weak data analysis.

Second, the huge jobs range is generated by tying higher imports to job loss. But a growing economy creates jobs and consumes more imports. In 2006, goods imports rose more than $180 billion over 2005 and labor force participation rose 0.6 percentage points over that period. A weak economy cuts imports and jobs. In 2009, imports fell $540 billion from 2008 while labor force participation fell 1.6 points.

As with Japan and its non-tariff barriers, the United States suffers far more from Chinese policies having little to do...