Wednesday, April 28, 2021

Countervailing action and currency manipulation - Has the dice been rolled?

Just when I thought currency manipulation was off the radar, this PIIE opinion by Joseph Gagnon re-emphasizes the danger of currency manipulation and how little the world is doing to address the probelm.The strong view that countries are manipulating currencies to encourage exports and disincentivize imports seems to be derived from foreign exchange interventions.

When countries have more than adequate levels of foreign exchange reserves, the only purpose of acquiring further reserves is to hold down the exchange value of the domestic currency. The reason to do that is to maintain competitive prices for one's exports and prevent a flood of imports. For countries that already have an excessive trade surplus, such behavior constitutes currency manipulation. The US current account deficit widened by $166 billion in 2020; a significant fraction of that widening is likely attributable to the increase in foreign currency manipulation last year.

Fred Bergsten and Gagnon have written an entire book on it titled "Currency Conflict and Trade Policy: A New Strategy for the United States" which argues for more decisive action against currency manipulation. In conclusion, apart from a series of strategies recommended, the authors suggested the countervailing of currency manipulation.

The recent countervailing action against Vietnam on the grounds that it's currency is undervalued and is subsidizing exports has been reported here and here. A more detailed Congressional Reserach Study report on countervailing duties and currency manipulation is found here.

Has the dice been rolled?

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