China’s Not The Only “Currency Manipulator” Out There—Are We Going To Tax Them All?

You wouldn’t like nationalistic Chinese protestors when they’re angry.


Mitt Romney has loudly and frequently said on the campaign trail that he would label the People’s Republic of China a “currency manipulator” and respond with higher taxes on goods made in China. This is an idea that hasn’t really gotten the scrutiny it deserves on the grounds that many people simply assume that Romney won’t actually do this. It’s certainly possible that he won’t (remember when Obama was going to renegotiate NAFTA) but as long as the campaign is happening, we may as well talk about what the candidates are proposing.

One interesting wrinkle here is that Joe Gagnon, a leading currency manipulation hawk at the PIIE, points out that China is hardly the only country that does this (PDF). Since China’s really big, its foreign exchange interventions are a bigger deal that Malaysia’s or Thailand’s but relative to the size of their economies those countries are doign more manipulation than China. Indeed even after excluding all deeply poor countries from the list (on the ground that they deserve leeway) and excluding Sovereign Wealth Funds from the analysis, Gagnon comes up with a list of twenty countries engaging in substantial China-style currency manipulation. It’s perhaps worth asking if Romney wants to tax them all. Israel? Switzerland? Taiwan?

For my part, I find the whole manipulation issue a bit puzzling. It’s truly a sad day in economic history when a great nation like the United States can’t think of a better way to debase its own currency than to threaten foreigners with excise taxes.

If the Federal Reserve and the People’s Bank of China were to engage in a race where the Fed tries to print dollars to push the value down and China tries to buy dollars to push the value up, the Fed is inevitably going to win. We would have to undergo some inflation, obviously, but increasing the value of Chinese currency would also be inflation. The whole point of ending currency manipulation is to make made-in-China stuff more expensive in the United States. But whatever inflation impact existed in the United States would be dwarfed by domestic inflation in China, and the Chinese would have to blink first. There’s a lot that the USA can’t control in a complicated global economy but we can devalue our currency all on our own.