Debates over “Currency Manipulation”
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August 6, 2014
Debates over “Currency Manipulation”
Overview
Some Members of Congress and policy experts argue that
manipulating their exchange rates. Part of the debate is
U.S. companies and jobs have been adversely affected by
which, if any, government policies should count as currency
the exchange rate policies adopted by China, Japan, and a
manipulation. Economists have also developed a number of
number of other countries. They allege that these countries
models to estimate whether the actual value of a currency
use policies to “manipulate” the value of their currency in
differs from what it “should” be according to economic
order to gain an unfair trade advantage against other
fundamentals. Various models produce different results.
countries, including the United States.
A 2012 study by the Peterson Institute of International
Other analysts are more skeptical about currency
Economics identifies countries that have engaged in large
manipulation being a significant problem. They raise
interventions in foreign exchange markets over a long
questions about whether government policies have long-
period of time as “currency manipulators.” These countries
term effects on exchange rates; whether it is possible to
include China, Denmark, Hong Kong, Malaysia, South
differentiate between “manipulation” and legitimate central
Korea, Singapore, Switzerland, and Taiwan.
bank activities; and the net effect of currency manipulation
on the U.S. economy.
Some analysts have also recently accused Japan of currency
manipulation. In the first half of 2013, Japan’s central bank
Background
launched a new set of expansionary monetary policies,
similar to the Fed’s quantitative easing programs. Japan’s
What is currency manipulation? At the heart of current
policies contributed to a decline in the value of the yen
debates is whether or not other countries are using policies
relative to the U.S. dollar. Japanese officials deny any
to intentionally weaken the value of their currency, or
manipulation of the yen.
sustain a weak currency, to gain a trade advantage. A weak
currency makes exports less expensive to foreigners, which
can spur exports and job creation in the export sector.
Can governments weaken their currencies? Economists
disagree about whether government policies have long-term
effects on exchange rates, particularly for countries with
floating exchange rates. However, some economists believe
that, at least in the short run, some government policies can
impact the value of currencies. One policy is buying and
selling domestic and foreign currencies (“intervening”) in
foreign exchange markets. Another is monetary policy, the
process by which the central bank controls the supply of
money in an economy. It is important to note that although
these policies can affect exchange rates, they may be
implemented for other reasons, such as increasing foreign
Existing Policy Frameworks
exchange reserves or combatting a domestic recession.
What frameworks are in place to address currency
What is the impact on the United States? If another
manipulation? Multilaterally, members of the International
country weakens its currency relative to the dollar, U.S.
Monetary Fund (IMF) have committed to refraining from
exports to the country may be more expensive and U.S.
manipulating their exchange rates to gain an unfair trade
imports from the country may be less expensive. As a
advantage. Violators could face loss of IMF funding,
result, U.S. exports to the country may be negatively
suspension of voting rights or, ultimately, expulsion from
affected, and U.S. producers of import-sensitive goods may
the IMF. The IMF has never publicly labeled a country as a
find it hard to compete with imports from the country. On
currency manipulator. Some argue that commitments made
the other hand, U.S. consumers who buy imports and U.S.
in the context of the World Trade Organization (WTO) are
businesses that rely on inputs from overseas may benefit,
relevant to disagreements over exchange rates, although this
because goods from the country may be less expensive.
view is debated. Exchange rates have also been discussed
by the G-7 and the G-20.
Which countries are accused of currency manipulation?
There is debate over which countries, if any, are
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Debates over “Currency Manipulation”
.
In the United States, the 1988 Trade Act (P.L. 100-418)
“fundamentally undervalued.” This would allow
addresses currency manipulation. A key component
higher import duties on merchandise imports from
requires the Treasury Department to analyze the exchange
countries with “fundamentally undervalued”
rate policies of other countries. If some countries are found
currencies.
to be manipulating their currencies, the Act requires the
Treasury Secretary, in some instances, to initiate
• The Currency Exchange Rate Oversight Reform
negotiations to eliminate the “unfair” trade advantage. The
Act of 2013 (S. 1114) would, among other
Act also has a semiannual reporting requirement on
provisions, proscribe negotiations and
exchange rates in major trading partners. Treasury has not
consultations with countries with fundamentally
found currency manipulation under the terms of the Act
“misaligned” exchange rates, and specify actions
since 1994.
to take against countries that have failed to take
action to eliminate exchange rate misalignments.
Are current frameworks effective? Some argue that they
are ineffective, particularly because the definitions of
Possible Policy Issues
“manipulation” are too vague. Others argue that the
frameworks are effective, and no recent actions have been
How should currency manipulation be defined and
taken by Treasury or the IMF because no country is
measured? Analysts debate the best way to define or
manipulating its currency.
operationalize currency manipulation. For example, some
argue that the IMF’s definition requires it to determine that
“We, the G-7 Ministers and Governors, reaffirm our longstanding
policies shaping the exchange rate level have been for the
commitment to market determined exchange rates and to consult
express purpose of increasing net exports, and that “intent”
closely in regard to actions in foreign exchange markets.”
is hard to establish. Analysts also disagree on how to
Statement by the G-7 Finance Ministers and Central Bank
calculate or estimate whether currencies are misaligned
Governors, February 12, 2013.
from their “equilibrium” long-term value, making the
classification of currencies as over- or under-valued
complex and subject to much debate.
Congressional Proposals
If the United States were to address currency
Some Members are calling for currency manipulation to
manipulation, what is the best forum for doing so?
be addressed in trade agreements. In 2013, 230
Different forums for addressing currency manipulation have
Representatives and 60 Senators sent letters to the Obama
various pros and cons. For example, some argue that
Administration calling for currency manipulation to be
addressing currency manipulation in a trade agreement is a
addressed in trade agreements under negotiation,
promising alternative to existing frameworks and sensible
particularly in the Trans-Pacific Partnership (TPP). The
given the strong links between exchange rates and trade.
TPP is a proposed free trade agreement that the United
Others disagree, because any agreement on currencies
States is negotiating with Japan and 10 other countries in
would apply only to parties of the agreement (and not to
the Asia-Pacific region.
countries more broadly in the global economy) and could
make the agreement more difficult to conclude.
Additionally, addressing currency manipulation is identified
as a principal negotiating objective in Trade Promotion
Would measures to combat currency manipulation
Authority (TPA) legislation introduced in the House and the
serve U.S. economic interests? Some analysts argue that
Senate in January 2014 (H.R. 3830; S. 1900). TPA is the
currency manipulation gives other countries an unfair
authority Congress grants to the President to enter into
competitive trade advantage over the United States. Others
certain reciprocal trade agreements and to have their
disagree, arguing that the effects on the U.S. economy are
implementing bills considered under expedited legislative
not unambiguously negative. U.S. consumers and U.S.
procedures when certain conditions have been met.
businesses that rely on inputs from overseas may benefit
when other countries have weak currencies. They also
The January 2014 bills call for U.S. trade agreement
caution that labeling other countries as currency
partners to “avoid manipulating exchange rates in order to
manipulators could trigger retaliation, making it more
prevent effective balance of payments adjustment or to gain
difficult for the United States to finance its trade deficit.
unfair competitive advantage.” The language calls for
multiple remedies, “as appropriate,” including "cooperative
For more information, see CRS Report R43242 Current
mechanisms, enforceable rules, reporting, monitoring,
Debates over Exchange Rates: Overview and Issues for
transparency, or other means.” When TPA was last
Congress by Rebecca Nelson.
renewed in 2002, Congress included exchange rate issues in
the “promotion of certain priorities” section (P.L. 107-210).
Rebecca M. Nelson, rnelson@crs.loc.gov, 7-6819
IF00045
Additionally, two bills introduced in the 113th Congress
are specifically focused on exchange rates:
• The Currency Reform for Fair Trade Act (H.R.
1276) would apply U.S. countervailing laws to
imports from countries whose currencies were
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