Currency manipulation is the practice of artificially setting exchange rates by the central banks of some of the U.S. trading partners in order to gain an unfair advantage. In addition to distorting the market, it is an illegal practice under both U.S. law and international agreements.
A number of our trading partners are manipulating the currency markets to keep the U.S. dollar artificially high, and their own currencies artificially low. By exploiting the world currency markets, countries like China and Japan effectively subsidize their exports to the U.S., and place a tariff on U.S. shipments to them. This manipulation is taking place on a massive scale. By some estimates, China’s Yuan is undervalued by as much as 40 percent in comparison to the U.S. dollar.
How does this happen?
Typically currency manipulation occurs when a country fixes the exchange rate of its currency relative to the currency of another country. It can include a requirement for a fixed exchange rate or the mandatory use of a country’s central bank for foreign exchange sales. This is done to give a country an unfair competitive advantage.
The effects of China’s manipulated and subsidized currency, for example, are extensive. First, China’s currency manipulation has contributed to the dramatic increase in the U.S. bilateral trade deficit with China, which now tops $268 billion a year. China has amassed foreign exchange reserves of more than $1 trillion, far surpassing any other nation’s reserves. China’s currency manipulation also attracts foreign investment into China and away from American manufacturing facilities. This flow of investment has already cost American workers their jobs.
When countries adopt artificial exchange rates that are not based on market forces, they not only exacerbate the U.S. trade imbalance, but they create global trade imbalances.
Additionally, currency manipulation results in a sizeable difference in labor costs. This difference creates the illusion of a comparative advantage for a given country. Ultimately, currency manipulation is a subsidy that can put American manufacturers at an unfair disadvantage in the global marketplace.