CurrencyManipulation
CurrencyManipulation
Currencymanipulation is an unacceptable practice that involves the deliberateadjustment of the currency exchange rate. Under normal circumstances,the price of different currencies should be determined by the marketforces of supply and demand. China is one of the countries that havebeen accused of bypassing the market forces by devaluing theircurrencies. By engaging in a deliberate manipulation of the currencyprices, China undermines a system that is based on the concept offloating exchange rate (Laffer, 2014). This has allowed thegovernment of China to prevent the floating exchange rate from actingas the automatic stabilizer of the macroeconomic events, which hascreated trade imbalances.
Althoughcurrency manipulation has allowed China to accumulate trade surplusesover the years, its practice has given it an unfair competitiveadvantage. This practice began in 1994 when China adopted a fixedrate policy that allowed the government to adjust the exchange ratein favor of the RMB (Berger, 2010). This change in policy gave Chinaan opportunity to pursue its export-oriented economic strategy, whichwas achieved by helping the local manufacturers to sell theirproducts in the international market at relatively lower prices.Although China started reforming its monetary policy in 2005 afterbeing pressured by the international community, economists hold thatthe price of RMB is below its actual market price, which suggeststhat China is still manipulating its currency.
Itis estimated that China engaging in substantial currency manipulationduring the 2008 global financial crisis. The RMB appreciated in 2010by a nominal value of about 34 % against the U.S. dollar, but itsreal rate of appreciation was 43 % (Morrison & Labonte, 2013).The main objective of devaluing the China’s currency has been toincrease the competitiveness of domestic products in theinternational market, and protect the national economy from theadverse effects of the global economic crisis. This is because thedevaluation of a currency makes the goods produced locally cheaperrelative to goods produced in other countries that observetransparency in their money markets.
Currencymanipulation has benefited China by increasing its exports at theexpense of a decline in exports from other countries, such as theUnited States. This is confirmed by the increase in imbalance oftrade between China and the U.S. Studies show that the U.S. had atrade deficit of about $ 124 billion in the year 2003, but thisshortfall more than doubled to reach $ 290.6 billion by 2013 (Yu,2009). This exponential increase in the trade deficit is associatedwith the devaluation of China’s currency, which has made it almostimpossible for the U.S. companies to sell their products in China dueto their high prices as compared to the Chinese products. On thecontrary, the Chinese companies are able to compete unfairly in theinternational market since their prices are relatively lower thanproducts from other countries.
Inconclusion, currency manipulation has allowed China to acquire anunfair competitive advantage by producing and selling its goods at aprice that is lower than its competitors. By depreciating the priceof its currency, China makes imports from foreign countries expensiveand its exports cheaper than they should be. Although this practicehas given China an opportunity to boost its economic growth andexpand its manufacturing sector, it is evident that it has hurt othereconomies that depend on the market forces to determine the price oftheir currencies.
References
Berger,M. (2010). China’scurrency manipulation and American job loss: How did we get here andwhat can be done to reverse this trend?Washington, DC: Georgetown University.
Laffer,B. (2014). Currencymanipulation and its distortion of free trade.San Francisco, CA: The Laffer Center.
Morrison,M. & Labonte, M. (2013). China’scurrency policy: An analysis of the economic issues.Washington, DC: Congressional Research Service.
Yu,A. (2009). China’s currency practices and currency manipulation:The power of action in inaction. GlobalBusiness and Development Law Journal,26, 578-605.