Currency Conflict and Trade Policy: A New Strategy for the United States

Currency Conflict and Trade Policy: A New Strategy for the United States

by C. Fred Bergsten, Joseph Gagnon

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Conflicts over currency valuations are a recurrent feature of the modern global economy. To strengthen their international competitiveness, many countries resort to buying foreign currencies to make their exports cheaper and their imports more expensive. In the first decade of the twenty-first century, for example, China's currency manipulation practices were so flagrant that they produced a backlash in the United States and other trading partners, prompting threats of retaliation. How damaging is the practice of currency manipulation—and how extensive is the problem? This book by C. Fred Bergsten and Joseph E. Gagnon—two leading experts on trade, investment, and the effects of currency manipulation—traces the history, causes, and effects of currency manipulation and analyzes a range of policy responses that the United States could adopt. The book is an indispensable guide to a complex and serious problem and what might be done to solve it.

Product Details

ISBN-13: 9780881327250
Publisher: Peterson Institute for International Economics
Publication date: 06/27/2017
Sold by: Barnes & Noble
Format: NOOK Book
File size: 10 MB

About the Author

C. Fred Bergsten, senior fellow and director emeritus, was the founding director of the Peterson Institute for International Economics (formerly the Institute for International Economics) from 1981 through 2012. He is serving his second term as a member of the President's Advisory Committee for Trade Policy and Negotiations and was co-chairman of the Private Sector Advisory Group to the United States–India Trade Policy Forum, comprising the trade ministers of those two countries, during 2007–14.

Joseph E. Gagnon, senior fellow since September 2009, was visiting associate director, Division of Monetary Affairs (2008–09) at the US Federal Reserve Board. Previously he served at the US Federal Reserve Board as associate director, Division of International Finance (1999–2008), and senior economist (1987–1990 and 1991–97). He has also served at the US Treasury Department (1994–95 and 1997–1999) and has taught at the Haas School of Business, University of California, Berkeley (1990–91).

Table of Contents

Preface ix

Acknowledgments xiii

1 Introduction 1

The Concept of Currency Conflict 2

Historical Background 3

Recent Developments: Renewal of Currency Conflict 7

Plan of the Book 14

2 Key Conceptual Issues 17

The Trade Balance and the Current Account Balance 18

Economic Policies and the Current Account Balance 33

3 Norms for Current Account Balances 47

Current Account Imbalances: The Good and the Bad 48

Currency Policies: Legitimate and Illegitimate 63

4 The "Decade of Manipulation" (2003-13) 69

Currency Aggressors of the Early 21st Century 70

What Constitutes Manipulation? 76

Impacts of Manipulation 86

Recent Developments and Outlook 116

Appendix 4A Public Saving of Nonrenewable Resource Revenues 123

5 Policy Options 129

Macroeconomic/Monetary versus Trade Policy 129

Multilateral versus Unilateral Action 130

Markets to the Rescue? 131

Specific Alternatives 133

Private Diplomacy 133

Mobilization of the International Monetary Fund 138

Reform of the International Monetary Fund 140

Mobilization of the World Trade Organization 143

Inclusion of Currency Issues in Future Trade Agreements 145

Changes in Fiscal Policy 154

Changes in Monetary Policy 155

Use of Countervailing Currency Intervention 156

Imposition of Capital Controls 162

Imposition of Unilateral Import Controls 163

Conclusion 167

6 Conclusions and Recommendations 169

The Currency Problem 169

Self-Insurance versus Manipulation 177

Offensive versus Defensive Intervention 178

The Special Case of Key Currency Countries 179

Rules versus (Lack of) Enforcement 182

Currency Policy and Trade Policy 186

A Proposed Strategy for the United States 186

Multilateralizing the Strategy 192

Currency Conflict and Foreign Policy 196

Conclusion 199

Appendix A Data Sources and Annual Data on Currency Manipulation 201

References 221

Index 229


2.1 What moves the current account balance? 27

3.1 The costs of financial crises 52

4.1 Official assets and net official flows of currency manipulators, 2003-13 72

4.2 Net official Rows of currency manipulators, 2000-15 73

4.3 Excess currency manipulation, 2000-15 74

4.4 Alternative official asset metric for mature market economies, 2014 83

4.5 Currency manipulators, 2015-16 119

4.6 Recent and projected current account imbalances in selected economies 121

4A.1 Fraction of resource production to save (s) with shared benefits strategy 125

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