Introduction In the21st century, currencymanipulation is by far, known to be the world’s most protectionistinternational economic policy, but neither the U.S. government nor theresponsible international institutions, the International Monetary Fund and theWorld Trade Organization, have established or produced effective responses tothis issue.
Moreover, currencymanipulation is a serious matter endangering the global economic balance,especially when several dominant economies are engaging in it at the same time. In developing and newly industrializedeconomies, widespread currency manipulation is considered to be the mostcrucial development of the past decade in international financial markets. Currencymanipulation results in moving jobs from one country to another, because acountry that keeps its currency exchange low, can export more goods andservices as the demand will be higher. Thus, the other countries lose theiremployment opportunities or jobs in favor of that country. And when a countrydevalues its currency it essentially wants to keep the cost of all its goodsand services less expensive than other countries. Currencymanipulation Reasons to why currency manipulation is happening is; maintainingcompetiveness, in terms of fair competition currency manipulation isuncooperative in maintaining a fair competition.
Next, is control inflation, controlling Inflation is crucial as anunrestricted increase of the prices may lead to culmination in Hyperinflation,as for Deflation it is a result of the excessive fall in the prices. Both thesituations are unhealthy for the overall growth and development of a country’seconomy. And eventually, there is financial stability, people tend to usecurrency manipulation to ensure that their financial stability is maintained.
It is identified over the past 11 years thatthe 20 most egregious currency manipulators in the world are characterized intofour groups of countries that stand out: longstanding advanced economies, suchas Japan and Switzerland; newly industrialized economies, like Palestine,Singapore, and Taiwan; developing Asian economies, such as China, Malaysia, andThailand; and oil exporters such as Algeria, and Russia. Moreover, we can saythat the primary answer to why countries manipulate their currency even thoughit may result in long term effects that contribute to hurting the country’seconomy is that governments are run by politicians who only tend to haveincentives to focus on short term effects. As when it comes to economicsgovernments don’t focus on the long term but instead on the short term only. Anexample, would be the Chinese politicians who thought manipulating thecurrency, would actually benefit them, as well as American politicians who voteyearly to increase the deficit.
Definition of key terms: Net drain: “net” refers to the gain you make after deductingcosts, expenses and losses made in bad deals e.g. net profit. Thefigurative meaning of “a drain” means loss, usually in a steady ortiring way. Currency Manipulation Is defined as “amonetary policy operation which occurs when a government or central bank buysor sells foreign currency in exchange for their own domestic currency Outputgap: The output gap is an economic measureof the difference between the actual output of an economy and its potential output.
Inflation: Is when the economy grows, and thereis a general increase in the prices of goods and services. Trade deficit: Is an economic measureof international trade in which a country’s imports exceedsits exports. A trade deficit represents an outflow of domesticcurrency to foreign markets. GoldStandard: A gold standard means that the valueof a country’s currency is based on the gold reserves of that country.
Pegging: Is fixing a certain price, amount, orrate at a particular level Background Information: President Trump backs away from labeling China a currencymanipulator “They’re not currency manipulators,” SaidTrump regarding China. President Trump says hewont brand China a currency manipulator, this is mainly because it isabsolutely critical for the worlds number one, and number two economies to gettogether, and get along. And there are three criterias in order for a countryto be labeled as a currency manipulator, and currently China only meets one ofthem. Another reason is because the US wants China with their side when speakingabout North Koreas nuclear issue, which has been one of the worlds mostcomplicated issues. As it has been widely recognized that you need China onside to help with resolving this issue, as China is North Koreas biggest tradepartner. Bretton Woods Conference In 1944, Bretton Woods conference washeld, and it was composed of 44 allied nations who their aim was to avoideconomic instability as well as crisis. They intended to focus on the timeperiod that was after World War ||. In this conference, they have established anew, monetary management system that was based on gold, and U.
S dollar. Theycalled it “The Bretton Woods System”, and it was besides the InternationalMonetary Fund (IMF). This idea was proposed by the United States, which thenultimately broke with the gold standard in 1971, and became the dominant powerbehind these two organizations. Thus currencies of Canada, Western Europe,Australia, and Japan were no longer fixed to gold nor to each other. After theagreement signed, the U.S was the only country capable to print dollars.
TheBretton Woods system worked well under the IMF supervision and thus they wereno currency manipulation taking place. During the late 1960s, the U.S wentunder pressure due to the Vietnam war, and the domestic welfare program causingthe U.S to abandon the system. Eventually, all countries started to abandon thesystem, and currency exchange rates became driven by supply and demand and thestrength of the individual economies of different countries. After World War | A gold standard which means that the value of a country’s currency isbased on the gold reserves of that country, was widely adopted by severalimportant economies from the mid 19th century, until the first World War.
Whichmeant that the exchange rates were stable, and currency manipulation was not anissue at that time, that wasn’t until after World War I was over that resultedin the rising of economic tensions and the circumstances of a currency war weregiven. There is no universal agreement on when the first currency war started,however there were several examples of currency manipulation that occurred inthe 1920s, therefore many economists and historians claim that the war hasstarted as early as 1921. Chinese government dictated value of yuan against U.S dollar In June 2010, China has fixed itsexchange rate against the U.S dollar to be 20 percent below its free marketvalue, a practice known as “pegging” which is defined as fixing the exchangerate of a local currency against hard currency. The Chinese have an objectiveof keeping the yuan low, in order to ensure the goods and services are competitivein order to export.
Timeline of Events Majorevents that influenced the currency market · Nixon Shock (1971) · Oil Crisis (1973) · Apartheid demise (1982) · Asian Financial crisis (1977) · The Gulf War (1991) · European debt crisis (2008) Relevant UN treaties: · 2015 Trade Facilitation and TradeEnforcement Act (and specifically the Bennet Amendment; Section 701) · The 1988 Omnibus Trade andCompetitiveness Act (section3004) Major Countries and Organizations Involved China Recently, numerous public officials and commentators claim that Chinahas engaged in impermissible ‘currency manipulation’. In October, 2008 President Obama has stated thatChina’s current trade surplus is because of to its manipulation of itscurrency’s value’. Over the past few years, various proposals have been made againstChina. Atdifferent times, China’s currency, the renminbi (RMB), has seen manydifferent policy regimes; it has been pegged to the dollar, allowed to float,and it was deliberately devalued by the Chinese government. Through all ofthat oscillation, the net result is that the Chinese currency has been, andcurrently still is, undervalued against the dollar compared to what it would beif left to market forces. U.N Conference on Trade and Development U.
N. agency has urgedChina to reject Western pressure to float its currency. In a policy brief, theU.N. Conference on Trade and Development, or UNCTAD, stated in an argument thatmarket forces have caused currency chaos in the world, and leaving currenciesto irrational market forcers will not help rebalance the global economy.
The United States China is probably the most well-known currency manipulator today, asthey have purchased previously unseen amounts of dollars to devalue the yuanand raise Chinese exports to an extremely competitive level. Meanwhile,American exports are getting weaker, and as China possesses the biggest dollarreserves of the world. Previous attempts to solve the issue: Both the the International Monetary Fund(IMF) and the World Trade Organization (WTO) are approaching the issue ofcurrency manipulation in their own way.
The measures that WTO had on currencymanipulation that were against subsidies failed to solve this issue. Therefore,new measures must be adapted and taken, to eliminate this issue. And thisshould be done through agreements made by the International Model UnitedNations. It seems that the WTO lack the power of interfering in any currencymanipulation dispute because its out of its jurisdiction.
This is evident bytheir inability to issue any real resolution or judgment on any currency manipulationdisputes. Possible Solutions Themost suitable solution in this case to combat currency manipulation is ascenario that is similar to the post World- War II. Examining and looking into thedestructions that currency manipulation has caused, has made the internationalcommunity understand the immediate need for a prohibition of such tactics. Ifthe international community was able to settle on the same conclusion, thenthey might after be able to develop a sufficient policy agency.The firststep to address this complicated issue might be changing IMF´s Articles ofAgreement that would guarantee the IMF more power in forcing countries notabiding to these rules. A second step to be taken, is by using the WTO´s power toclearly define currency manipulation in a more precise manner, in order forcountries to be able to distinguish between currency manipulation and subsidy,and differentiate between them.
Although, this would require a transparency ofcountries’ financial affairs national reserve banks. Eventually, these measuresthat would be taken may raise awareness in the countries private economicsectors about the dangers and effects of currency manipulation.