A new study issued by the Economic Policy Institute urges the U.S. government to take a strong stand against international currency manipulation, arguing that its effects cost the textile an apparel industry in the U.S. millions of jobs.
The report, entitled “Stop Currency Manipulation and Create Millions of Jobs,” contends that elevated trade deficits incurred over the last fifteen years accounts for the loss of an estimated 5.7 million jobs in the U.S. manufacturing sector. And the root cause of those trade deficits can be traced to an aggressively interventionist monetary policy. “Currency manipulation, which distorts trade flows by artificially lowering the cost of U.S. imports and raising the cost of U.S. exports, is the primary cause of these growing trade deficits. Currency manipulation has increased global trade imbalances by between $700 billion and $900 billion per year, but the United States has absorbed the largest share. Halting global currency manipulation by penalizing or offsetting currency manipulation is the best way to reduce trade deficits, create jobs, and rebuild the economy.”
While China is hardly the only nation involved in currency manipulation, the report identifies as a particularly egregious culprit, especially given the expansive scope of its foreign currency reserves. “China is by far the largest holder of total FX reserves, both in terms of the size of its reserve fund and its economic impact on global trade flows. But several other Asian countries and oil-exporting nations, as well as a few countries in Europe, have also intervened heavily in FX markets. Total FX reserves equaled 45 percent of China’s GDP at the end of 2011.”
The study also cites Taiwan, Malaysia, Switzerland, Singapore, Norway, Saudi Arabia and Qatar but none of these rival the reverberations of China’s monetary practices. “However, China dwarfs all other currency manipulators in terms of its total global current-account surplus, and total FX holdings, due in part to the size of its economy. Among all currency manipulators, China had the largest 2012 current-account surplus ($191 billion), as estimated by the IMF (Bergsten and Gagnon 2012). Furthermore, trade data from the United Nations Comtrade program suggest that China has been substantially underreporting its trade and current-account surpluses for at least the last six years.”
Also, China’s practices potentially encourage other countries to follow suit. Some experts are worried that the depreciation of the yuan could have a contagion effect, infecting the Taiwanese dollar, Japanese yen and Korean won. In a recent note issued by Barclays Bank, analysts surmised this could be possible if the depreciation continues. “If we are looking at the beginning of some competitive depreciation – aimed at supporting exports and growth – the contagion implications are greater. In such a scenario, we would expect investors to turn more defensive on regional currencies on expectations that policymakers elsewhere could adjust their currency strategy,” the note said.
The issue of China’s intentional depreciation of the renminbi in the last two weeks has brought renewed international attention to its fiscal policy. The renminbi dropped almost 1 percent in a week’s time, a minor movement by most standards, but a pendulum swing not experienced since 2012.
The sudden depreciation of the renminbi, also known as the yuan, rattled many investors who have taken large, long-term positions on the currency on the basis of its historic stability. The official stance of the Chinese central bank has been to steward the yuan to a graduated appreciation against the dollar, a fiscal concession to critics who argued that China artificially depreciated its currency to boost the competitiveness of its exports. As a consequence of the appreciation, foreign money has been flooding the Chinese market, often strategically circumventing currency controls. Prior to the sell-off, the inflation-adjusted yuan had gained 43 percent against its primary trading partners since the Chinese central bank jettisoned its strict dollar-peg in July 2005.
Since U.S. trade is dominated by manufactured goods, and because China is such a dominant player in the global manufacturing arena, the consequences of currency manipulation exact a heavy toll on manufactured products worldwide. “Most traded goods are manufactured products. Between 2000 and 2012, more than two-thirds (68.5 percent) of the U.S. goods trade deficit was composed of manufactured products (USITC 2013), and most of the rest was composed of crude oil. Growing U.S. trade deficits over the past 15 years have eliminated millions of U.S. jobs, with manufacturing particularly hard-hit. Since April 1998, the United States has lost 5.7 million manufacturing jobs (Bureau of Labor Statistics 2013b), nearly a third of manufacturing employment, and most of those job losses were due to the growing U.S. trade deficit. For example, the rise in the U.S. trade deficit with China alone between 2001 and 2011 eliminated 2.7 million U.S. jobs, over 2.1 million (76.9 percent) of which were in manufacturing.”
The apparel and textile industry, as dependent as it is on China for production, is particularly vulnerable to the effects of currency manipulation. “Growing imports did result in net job losses in some industries, including apparel and accessories (107,400 and 66,000 jobs). Although losses in apparel and accessories represent a small share of jobs gained (â€‘4.7 percent and -1.1 percent of the total gains), these losses would represent 39.4 percent and 24.2 percent of 2011 employment in these industries, which have been decimated by trade over the past few decades. Other industries suffering losses include (crude) oil and gas (extraction), with losses of 24,900 and 11,400 jobs, and leather and apparel products, with losses of 22,200 and 10,800 jobs, representing 46.5 percent and 22.6 percent, respectively, of employment in this industry in 2011.”
The full report can be found here.