The myth of currency manipulation: the Bergsten /Schumer/Portman theory is wrong.

• Author: Katz, Richard

By the narrowest of margins, 51-48, the U.S. Senate defeated on May 22 an amendment to the Trade Promotion Authority that would have required that trade pacts such as the Trans-Pacific Partnership include a provision penalizing countries found to be "currency manipulators." No other members of TPP would have agreed to such a provision; hence, it would have killed TPP.

In fact, killing TPP was one of the objectives of policymakers such as Senator Charles Schumer (D-NY) as a way of charging China with currency manipulation. Others, such as Senator Rob Portman (R-OH), were determined to show how tough they could be toward Japan in a difficult reelection year in an auto state. Portman was one of the lead sponsors of the currency amendment that would have won had just two senators changed their minds.

And yet, most of the talk about currency is based on total myths.

CHINA, JAPAN NOT MANIPULATORS, SAYS IMF

Neither of the two biggest targets of the currency hawks, China and Japan, meet the International Monetary Fund criteria for being a currency manipulator. This is acknowledged even by Fred Bergsten, the founder and former chief of the Peterson Institute for International Economics, a champion of adding currency clauses to trade pacts. Bergsten is one of the originators of the notion that currency manipulation by China and nineteen other countries is costing America anywhere from one to five million jobs. Bergsten says China was a "manipulator" in the past, but no longer is. (On the whole currency issue, Bergsten is speaking for himself, not the Peterson Institute, where many other experts have publicly taken an opposite view.) As we will detail below, this charge of millions of lost jobs is a complete myth.

It seems that those wanting to target China are willing to blame it for all sorts of America's self-created problems, including the housing crisis and consequent 2008 Lehman shock. In a February 24 statement explaining his call for putting enforceable currency provisions in TPP, Rep. Sander Levin (D-MI) favorably cited an op-ed by Sebastian Mallaby in the Washington Post which falsely claimed that China's alleged currency manipulation "is arguably the most important cause of the financial crisis. Starting around the middle of this decade, China's cheap currency led it to run a massive trade surplus. The earnings from that surplus poured into the United States. The result was the mortgage bubble." Bergsten has also repeated this charge. (In reality, the fault lies not in Beijing, but in America's homegrown financial malfeasance).

RMB UP 33 PERCENT AGAINST THE DOLLAR

It is true that China runs a "floating peg" system rather than a free-floating currency. But that does not in itself violate any international trade rules, as even Levin admits. For several years before July 21, 2005, the RMB was pegged at a fixed rate versus the dollar. Since then, Beijing has let the currency appreciate over many years, rather than letting the market send it up so abruptly as to destabilize its economy.

The upshot is that, in the past ten years, the RMB has appreciated 33 percent against the dollar. It did this at the same time that the broad currency index of all of America's trading partners fell 5 percent against the dollar. Had China merely matched others' behavior, the RMB, too, would have fallen against the dollar, especially during the crisis years of 2008-2009. Instead, it rose (see Figure 1). On a "real" basis, that is, adjusting for differing rates of inflation in the United States and China, China's RMB was up 42 percent as...