The editors at Bloomberg have a short piece in which they criticize unilateral action against alleged Chinese currency manipulation. They say we need to take multilateral action instead:
... China does manipulate its currency. By deliberately holding down the exchange rate of the renminbi, it has made its exports artificially cheap and done real harm to producers in other countries, including the U.S. Although the renminbi has appreciated by 11 percent since Obama took office, the increase in China’s foreign reserves demonstrates that the currency is still cheap. The country’s rising dollar reserves also show how much China is still helping to finance the U.S. budget deficit -- another complication for Americans who want to get tough.
China, though, isn’t alone in managing its exchange rate to boost exports. It just happens to be the biggest offender. Others include Japan, which is on track to edge out China as the U.S. government’s largest creditor.
Hence, the U.S. needs to take a fairer, more comprehensive approach in its efforts to restore global balance. Rather than singling China out, the U.S. should work toward bringing currency policy under more effective review, either through the International Monetary Fund or the World Trade Organization. Member countries should promise to allow movement of currencies toward levels that would reduce trade imbalances. The WTO could decide when and how to punish those who failed to comply -- an approach that would insulate the process from political vagaries, such as the outcome of the U.S. presidential election.
I've written about this before, so it seems worth trying to clarify some aspects of this. I agree that unilateral action is a mistake, and I wouldn't mind seeing some multilateral discussions of this issue. However, their multilateral proposal seems strange to me. They argue that "countries should promise to allow movement of currencies toward levels that would reduce trade imbalances." The problem here is that they focus on the wrong thing: "trade imbalances." A trade imbalance, especially a bilateral one, is not a very good indicator of anything, in my view. It is both over- and under-inclusive. When a country goes into recession, it may buy fewer imports, leading to a trade imbalance. But this is no reason to take action against the country. On the other side, a country with a large trade deficit might use currency manipulation to favor the domestic industry, but still maintain a (smaller) trade deficit. So, I don't think a focus on trade imbalances makes much sense. (Of course, that's just part of my more general view that focusing on trade deficit numbers doesn't make much sense!)
What multilateral rules could do, possibly, is try to sort out whether a country is trying to favor domestic producers over foreign competitors through its currency practices. That's not easy, of course, but some economists have tried to come up with reasonable approaches. (There was one in particular that I thought was detailed and sensible, but I can't seem to locate it right now.)
Brazil has recently started pushing for more discussion of this issue at the WTO. Will this lead to anything?
