However, in 2012, arguments that China was manipulating its currency and costing the US jobs were a central part of Mitt Romney's failed presidential campaign (though, perhaps, far from the cause of his failure). Here are three points of view on this, mostly circa 2012.
The Case Against China: Peter Navarro laid out the argument for China as currency manipulator in China’s Currency Manipulation: A Policy Debate in a 2012 World Affairs article. Navarro makes the claim that:
Most economists estimate the Chinese yuan is grossly undervalued by anywhere from twenty-five to forty percent—and only propagandists like the China Daily and hired guns for China profiteers like Goldman Sachs and Morgan Stanley claim otherwise.
As will be seen below, this claim may be greatly exaggerated or at least out of date by 2012. However, the rapid appreciation of the renminbi vs the dollar since China abandoned its peg in 2005 ( interrupted only by a 2-year plateau during the US recession), suggests that the currency was undervalued for much of the first decade of this century. Navarro argues that this undervaluation had a negative effect on the US economy:
China’s unfair trade practices have indeed taken a very heavy toll on the American economy. Consider that for the second half of the twentieth century, the US gross domestic product grew at a healthy rate of about 3.5 percent annually. Since China joined the WTO in 2001, however, that rate has fallen to an average of only 1.6 percent. While the loss of almost two percentage points of GDP growth a year may not seem like much, it translates into a failure to create two million jobs a year and cumulatively more than twenty million jobs lost to slow growth since 2001. Not coincidentally, that’s almost the exact number of jobs America now needs to get its people fully back to work.
Note, however, that the evidence here is based on a simplistic before and after China joined the WTO comparison and ignores the fact that the decade following China's entry into the WTO included the largest recession in the US since the Great Depression. In fact, if we actually look at the actual Federal Reserve data in the form of the below graph of the annual percent change from one year ago of US real GDP, we see a less clear cut story.
The graph shows that, prior to the 1990s the US economy rode a roller coaster (albeit with a high ride in the 1960s) before enjoying fairly stable growth in the 2.5-5% range during the 90s. Since 2001, things have not been as good but the two recessions in that time have obvious effects. Indeed, the full magnitude of the Great Recession is on full display here as the graph dips lower in 2009 than at any other time.
Note, the US economy got back into the 2.5-5% growth band between the recessions, precisely when China's currency manipulation was at its peak. Unfortunately the economy has achieved growth rates comfortable within that range despite the fact the renminbi has resumed appreciating against the dollar.
The Case Against China Currency Critics: Edward Lazear argues that Chinese 'Currency Manipulation' Is Not the Problem in a 2013 WSJ Op-Ed. [If thwarted by the WSJ's paywall, summaries of Lazear's Op-ed can be found here and here.]
Lazear compares the yuan-dollar exchange rate with China's exports to the US and Europe from 1995 to 2011. He notes that Chinese exports have steadily increased throughout this period except for a downturn during the Great Recession. However, during this period, the renminbi dropped in value as it rode the US dollars depreciation until the 8 to 1 peg was removed in 2005. As noted above, the reminbi has increased in value since then but imports have continued to trend upwards.
More importantly, the trend in exports to Europe does not differ from the trend in exports to the US, indeed they are nearly identical. This holds even during the period in which the exchange rate was pegged at 8 yuan to the dollar and the renminbi was depreciating against the Euro but not against the dollar. In this period, exports to Europe increased by 35% while exports to the US increased by 32%. Lazear argues that the differences in the exchange rate might explain the difference between 35% and 32% growth but the bulk of the growth in both categories is determined by other factors.
Lazear concludes that, while China certainly was manipulating its currency, this manipulation was not the source of its export growth or disappointing job and wage growth in the US.
The Case Against Currency Manipulation, but China Not-So-Much Anymore: In 2012, Joseph Gagnon examined currency manipulation across nations in a policy brief for the Peterson Institute, Combating Widespread Currency Manipulation (PB12-19). Gagnon defines a currency manipulation as follows:
In his brief, Gagnon finds that 20 nations engage in "egregious" currency manipulation in one of four generala categories:
(1) longstanding advanced economies such as Japan and Switzerland;
(2) newly industrialized economies such as Israel, Singapore, and Taiwan;
(3) developing Asian economies such as China, Malaysia, and Thailand; and
(4) oil exporters such as Algeria, Russia, and Saudi Arabia. (Gagnon, 2012, p 2)
Most of this manipulation takes to form of purchases of foreign currency aimed at lowering the value of the home currency in order to run a current account surplus (i.e., a trade surplus). Gagnon estimates that the total effect of these 20 nations may be as larges a $1.5 trillion per year and that this may have pushed the US current account down an average of 4% of US GDP.
Gagnon provides a table showing the nations he identified as the most egregious manipulators, along with several indicators of manipulation. The list below shows these nations rank ordered by the first indicator in Gagnon's table, 2011 Foreign Reserves as % of GDP.
Nation 2011 Foreign Reserves as % of GDP
Libya 271
Hong Kong 121
Algeria 97
Saudi Arabia 94
Singapore 93
Taiwan 83
Thailand 49
Malaysia 48
China 45
Switzerland 44
Bolivia 40
Philippines 32
Israel 31
Angola 28
Korea 27
Russia 25
Denmark 24
Japan 21
Azerbaijan 17
Argentina 9
Source: Gagnon, 2012, Table 1
It is interesting to note the broad range of nations and the large number of Asian nations that show up on it. It should also be pointed out that China, in ninth position, is middle of the pack, between Malaysia and Switzerland. It should also be pointed out that foreign reserves can accumulate over time and reflect past as well as current policy.
While China is in the middle of the pack in the above list (which is scaled to GDP), it stands at the top when the absolute size of foreign reserves are measured. In a blog post, Gagnon provided this ranking of currency manipulators and China stands head and shoulders above everyone else (with only Japan coming close).
However, though China tops the list because of the size of its reserves, Gagnon notes "...although China tops this list, its reserves have been relatively stable over the past 12 months [July 2011-July 2012], suggesting a marked change in its behavior." So, while China may be holding larges reserves of dollars acquired from past manipulation, it is no longer adding much to this pile, which suggests that it has changed its ways. More specifically, that the renminbi had appreciated enough by mid 2011 to approach its equilibrium value.
Indeed, in September 2012 Ganon was joined by C Fred Berstein in an Op-Ed to the Financial Times in which they argued argued for measures against nations practicing currency manipulation but noted that China "...has not been the major perpetrator of late." They identified the major culprits as follows:
Three distinct groups are now involved. First are other Asian countries, including Japan, Singapore, Taiwan, Korea, Hong Kong, Thailand, and Malaysia. Second are major oil exporters including the United Arab Emirates, Russia, Norway, Saudi Arabia, Kuwait, and Algeria. Third are rich countries near to the euro area, most notably Switzerland but also Denmark and Israel.
Note, however, that the evidence here is based on a simplistic before and after China joined the WTO comparison and ignores the fact that the decade following China's entry into the WTO included the largest recession in the US since the Great Depression. In fact, if we actually look at the actual Federal Reserve data in the form of the below graph of the annual percent change from one year ago of US real GDP, we see a less clear cut story.
The graph shows that, prior to the 1990s the US economy rode a roller coaster (albeit with a high ride in the 1960s) before enjoying fairly stable growth in the 2.5-5% range during the 90s. Since 2001, things have not been as good but the two recessions in that time have obvious effects. Indeed, the full magnitude of the Great Recession is on full display here as the graph dips lower in 2009 than at any other time.
Note, the US economy got back into the 2.5-5% growth band between the recessions, precisely when China's currency manipulation was at its peak. Unfortunately the economy has achieved growth rates comfortable within that range despite the fact the renminbi has resumed appreciating against the dollar.
The Case Against China Currency Critics: Edward Lazear argues that Chinese 'Currency Manipulation' Is Not the Problem in a 2013 WSJ Op-Ed. [If thwarted by the WSJ's paywall, summaries of Lazear's Op-ed can be found here and here.]
Lazear compares the yuan-dollar exchange rate with China's exports to the US and Europe from 1995 to 2011. He notes that Chinese exports have steadily increased throughout this period except for a downturn during the Great Recession. However, during this period, the renminbi dropped in value as it rode the US dollars depreciation until the 8 to 1 peg was removed in 2005. As noted above, the reminbi has increased in value since then but imports have continued to trend upwards.
More importantly, the trend in exports to Europe does not differ from the trend in exports to the US, indeed they are nearly identical. This holds even during the period in which the exchange rate was pegged at 8 yuan to the dollar and the renminbi was depreciating against the Euro but not against the dollar. In this period, exports to Europe increased by 35% while exports to the US increased by 32%. Lazear argues that the differences in the exchange rate might explain the difference between 35% and 32% growth but the bulk of the growth in both categories is determined by other factors.
Lazear concludes that, while China certainly was manipulating its currency, this manipulation was not the source of its export growth or disappointing job and wage growth in the US.
The Case Against Currency Manipulation, but China Not-So-Much Anymore: In 2012, Joseph Gagnon examined currency manipulation across nations in a policy brief for the Peterson Institute, Combating Widespread Currency Manipulation (PB12-19). Gagnon defines a currency manipulation as follows:
Currency manipulation occurs when a government
buys or sells foreign currency to push the exchange
rate of its currency away from its equilibrium value or
to prevent the exchange rate from moving toward its
equilibrium value. (Gagnon, 2012, p. 1)
In his brief, Gagnon finds that 20 nations engage in "egregious" currency manipulation in one of four generala categories:
(1) longstanding advanced economies such as Japan and Switzerland;
(2) newly industrialized economies such as Israel, Singapore, and Taiwan;
(3) developing Asian economies such as China, Malaysia, and Thailand; and
(4) oil exporters such as Algeria, Russia, and Saudi Arabia. (Gagnon, 2012, p 2)
Most of this manipulation takes to form of purchases of foreign currency aimed at lowering the value of the home currency in order to run a current account surplus (i.e., a trade surplus). Gagnon estimates that the total effect of these 20 nations may be as larges a $1.5 trillion per year and that this may have pushed the US current account down an average of 4% of US GDP.
Gagnon provides a table showing the nations he identified as the most egregious manipulators, along with several indicators of manipulation. The list below shows these nations rank ordered by the first indicator in Gagnon's table, 2011 Foreign Reserves as % of GDP.
Nation 2011 Foreign Reserves as % of GDP
Libya 271
Hong Kong 121
Algeria 97
Saudi Arabia 94
Singapore 93
Taiwan 83
Thailand 49
Malaysia 48
China 45
Switzerland 44
Bolivia 40
Philippines 32
Israel 31
Angola 28
Korea 27
Russia 25
Denmark 24
Japan 21
Azerbaijan 17
Argentina 9
Source: Gagnon, 2012, Table 1
It is interesting to note the broad range of nations and the large number of Asian nations that show up on it. It should also be pointed out that China, in ninth position, is middle of the pack, between Malaysia and Switzerland. It should also be pointed out that foreign reserves can accumulate over time and reflect past as well as current policy.
While China is in the middle of the pack in the above list (which is scaled to GDP), it stands at the top when the absolute size of foreign reserves are measured. In a blog post, Gagnon provided this ranking of currency manipulators and China stands head and shoulders above everyone else (with only Japan coming close).
However, though China tops the list because of the size of its reserves, Gagnon notes "...although China tops this list, its reserves have been relatively stable over the past 12 months [July 2011-July 2012], suggesting a marked change in its behavior." So, while China may be holding larges reserves of dollars acquired from past manipulation, it is no longer adding much to this pile, which suggests that it has changed its ways. More specifically, that the renminbi had appreciated enough by mid 2011 to approach its equilibrium value.
Indeed, in September 2012 Ganon was joined by C Fred Berstein in an Op-Ed to the Financial Times in which they argued argued for measures against nations practicing currency manipulation but noted that China "...has not been the major perpetrator of late." They identified the major culprits as follows:
Three distinct groups are now involved. First are other Asian countries, including Japan, Singapore, Taiwan, Korea, Hong Kong, Thailand, and Malaysia. Second are major oil exporters including the United Arab Emirates, Russia, Norway, Saudi Arabia, Kuwait, and Algeria. Third are rich countries near to the euro area, most notably Switzerland but also Denmark and Israel.
So, if the US were to let nationality blind currency manipulation seeking missiles, they would by pass China for a mixed bag of nations, which would include many staunch allies and trading partners.
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