June 17, 2018
A couple of weeks ago, I joked that it seemed as though Washington Post reporters are not allowed to mention the importance of the value of the dollar in trade. This was after reading a lengthy article on how low farm prices are hurting farmers which never once mentioned the rise in the value of the dollar over the last four years.
The basic story is that, other things equal, the higher the value of the dollar against the euro, yen, and other major currencies, the lower the dollar price of wheat, corn, and other farm commodities. The relatively high dollar has been an important factor depressing prices received by US farmers in recent years, but for some reason, the Post never mentioned this fact.
Steven Mufson gives perhaps an even more egregious example of not talking about currency in his discussion of US trade relations with China over the last three decades. Incredibly, the piece never once mentions the explicit decision by China to keep down the value of its currency against the dollar in order to maintain and expand its trade surplus. This practice, sometimes called “currency manipulation” led China to run a trade surplus that peaked at just under 10 percent of GDP in 2007. This is especially striking since economists would ordinarily expect a rapidly growing developing country like China to be running a large trade deficit, since it would be an importer of capital.
While China’s currency is probably less under-valued today than a decade ago (which explains the large decline in its trade surplus), it is still deliberately held down by the government which is holding more than $4 trillion either as direct central bank reserves or in its sovereign wealth fund. As the CIA World Factbook notes:
“note: because China’s exchange rate is determined by fiat rather than by market forces, the official exchange rate measure of GDP is not an accurate measure of China’s output; GDP at the official exchange rate substantially understates the actual level of China’s output vis-a-vis the rest of the world; in China’s situation, GDP at purchasing power parity provides the best measure for comparing output across countries.”
The continued under-valuation of China’s currency is a major factor in the US trade deficit. A president who was committed to more balanced trade would have currency values at the top of their agenda.
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