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1 1 (June 22, 2020)

handle is hein.crs/govdfyy0001 and id is 1 raw text is: Debates over Currency Manipulation - mmm, go mppm qq\ , q I aS 11LULANJILiN, Updated June 22, 2020 Some Members of Congress and policy experts argue that U.S. companies and jobs have been adversely affected by the exchange rate policies adopted by other countries. They allege that these countries use policies to manipulate the value of their currency in order to gain an unfair trade advantage against other countries, including the United States. Other analysts are more skeptical about currency manipulation being a significant problem. They raise questions about whether government policies have long- term effects on exchange rates, whether it is possible to differentiate between manipulation and legitimate central bank activities, and the net effect of currency manipulation on the U.S. economy. What is currency manipulation? At the heart of current debates is whether or not other countries are using policies to intentionally weaken the value of their currency, or sustain a weak currency, to gain a trade advantage. If another country weakens its currency relative to the dollar, U.S. exports to the country may be more expensive and U.S. imports from the country may be less expensive. As a result, U.S. exports to the country may be negatively affected, and U.S. producers of import-sensitive goods may find it hard to compete with imports from the country. On the other hand, U.S. consumers who buy imports and U.S. businesses that rely on inputs from overseas may benefit, because goods from the country may be less expensive. 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 assess that, at least in the short run, some government policies can affect the value of currencies. One policy is buying and selling domestic and foreign currencies (intervening) in foreign exchange markets. A number of economic policies, including monetary, fiscal, and structural policies, may also affect exchange rate levels but they may be pursued for policy goals unrelated to trade. For example, a central bank may adopt expansionary monetary policies to combat a domestic recession, which may have the simultaneous effect of depreciating the currency. Which countries are accused of currency manipulation? There is debate over which countries, if any, are manipulating their exchange rates. Part of the debate is which, if any, government policies should count as currency manipulation. Economists have also developed a number of models to estimate whether the actual value of a currency differs from what it should be according to economic fundamentals. Various models produce different results. According to a 2017 study by economists at the Peterson Institute for International Economics, currency manipulation has largely been in remission since 2014. However, the dollar has strengthened in recent months following the outbreak of the COVID-19 pandemic and ensuing economic lockdowns (Figure 1), which may renew currency concerns. A strong dollar makes it more difficult for some U.S. firms to compete against foreign producers. Figure I. Nominal Broad Dollar Index . .- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N' Source: Federal Reserve. Note: An increase on the graph represents an appreciation of the U.S. dollar against other currencies. Monthly data through May 2020. Multilaterally, members of the International Monetary Fund (IMF) have committed to refraining from manipulating their exchange rates to gain an unfair trade advantage. Violators could face loss of IMF funding, suspension of voting rights or, ultimately, expulsion from the IMF. The IMF has never publicly labeled a country as a currency manipulator. Some argue that commitments made in the context of the World Trade Organization (WTO) are relevant to disagreements over exchange rates, although this view is debated. Exchange rates are also discussed by the G-7 and the G-20, where commitments to refrain from currency manipulation are now routinely emphasized. Provisions in U.S. law also address currency manipulation. The 1988 Trade Act (P.L. 100-418) requires the Treasury Department to analyze and report on semiannually the exchange rate policies of major U.S. trading partners. If some countries are found to be manipulating their currencies, the act requires the Treasury Secretary, in some instances, to initiate negotiations to eliminate the unfair trade advantage. Between August 2019 and January 2020, Treasury Secretary Steven Mnuchin labeled China as a currency manipulator under the terms of the 1988 Trade Act, the first such designation in 25 years. The Trade Facilitation and Trade Enforcement Act of 2015 (P.L. 114-125) adds new reporting requirements and directs the Treasury Department in some instances to take action against countries that have: (1) a significant bilateral

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