Introduction In the 21st century, currency manipulation is by far, known to be the world’s most protectionist international economic policy, but neither the U.S. government nor the responsible international institutions, the International Monetary Fund and the World Trade Organization, have established or produced effective responses to this issue. Moreover, currency manipulation is a serious matter endangering the global economic balance, especially when several dominant economies are engaging in it at the same time. In developing and newly industrialized economies, widespread currency manipulation is considered to be the most crucial development of the past decade in international financial markets.
Currency manipulation results in moving jobs from one country to another, because a country that keeps its currency exchange low, can export more goods and services as the demand will be higher. Thus, the other countries lose their employment opportunities or jobs in favor of that country. And when a country devalues its currency it essentially wants to keep the cost of all its goods and services less expensive than other countries. Currency manipulation Reasons to why currency manipulation is happening is; maintaining competiveness, in terms of fair competition currency manipulation is uncooperative in maintaining a fair competition. Next, is control inflation, controlling Inflation is crucial as an unrestricted increase of the prices may lead to culmination in Hyperinflation, as for Deflation it is a result of the excessive fall in the prices. Both the situations are unhealthy for the overall growth and development of a country’s economy.
And eventually, there is financial stability, people tend to use currency manipulation to ensure that their financial stability is maintained. It is identified over the past 11 years that the 20 most egregious currency manipulators in the world are characterized into four groups of countries that stand out: longstanding advanced economies, such as Japan and Switzerland; newly industrialized economies, like Palestine, Singapore, and Taiwan; developing Asian economies, such as China, Malaysia, and Thailand; and oil exporters such as Algeria, and Russia. Moreover, we can say that the primary answer to why countries manipulate their currency even though it may result in long term effects that contribute to hurting the country’s economy is that governments are run by politicians who only tend to have incentives to focus on short term effects. As when it comes to economics governments don’t focus on the long term but instead on the short term only. An example, would be the Chinese politicians who thought manipulating the currency, would actually benefit them, as well as American politicians who vote yearly to increase the deficit. Definition of key terms: Net drain: “net” refers to the gain you make after deducting costs, expenses and losses made in bad deals e.g. net profit.
The figurative meaning of “a drain” means loss, usually in a steady or tiring way. Currency Manipulation Is defined as “a monetary policy operation which occurs when a government or central bank buys or sells foreign currency in exchange for their own domestic currency Output gap: The output gap is an economic measure of the difference between the actual output of an economy and its potential output. Inflation: Is when the economy grows, and there is a general increase in the prices of goods and services. Trade deficit: Is an economic measure of international trade in which a country’s imports exceeds its exports. A trade deficit represents an outflow of domestic currency to foreign markets. Gold Standard: A gold standard means that the value of a country’s currency is based on the gold reserves of that country.
Pegging: Is fixing a certain price, amount, or rate at a particular level Background Information: President Trump backs away from labeling China a currency manipulator “They’re not currency manipulators,” Said Trump regarding China. President Trump says he wont brand China a currency manipulator, this is mainly because it is absolutely critical for the worlds number one, and number two economies to get together, and get along. And there are three criterias in order for a country to be labeled as a currency manipulator, and currently China only meets one of them. Another reason is because the US wants China with their side when speaking about North Koreas nuclear issue, which has been one of the worlds most complicated issues. As it has been widely recognized that you need China on side to help with resolving this issue, as China is North Koreas biggest trade partner.
Bretton Woods Conference In 1944, Bretton Woods conference was held, and it was composed of 44 allied nations who their aim was to avoid economic instability as well as crisis. They intended to focus on the time period that was after World War ||. In this conference, they have established a new, monetary management system that was based on gold, and U.S dollar. They called it “The Bretton Woods System”, and it was besides the International Monetary Fund (IMF).
This idea was proposed by the United States, which then ultimately broke with the gold standard in 1971, and became the dominant power behind these two organizations. Thus currencies of Canada, Western Europe, Australia, and Japan were no longer fixed to gold nor to each other. After the agreement signed, the U.
S was the only country capable to print dollars. The Bretton Woods system worked well under the IMF supervision and thus they were no currency manipulation taking place. During the late 1960s, the U.S went under pressure due to the Vietnam war, and the domestic welfare program causing the U.S to abandon the system. Eventually, all countries started to abandon the system, and currency exchange rates became driven by supply and demand and the strength of the individual economies of different countries. After World War | A gold standard which means that the value of a country’s currency is based on the gold reserves of that country, was widely adopted by several important economies from the mid 19th century, until the first World War.
Which meant that the exchange rates were stable, and currency manipulation was not an issue at that time, that wasn’t until after World War I was over that resulted in the rising of economic tensions and the circumstances of a currency war were given. There is no universal agreement on when the first currency war started, however there were several examples of currency manipulation that occurred in the 1920s, therefore many economists and historians claim that the war has started as early as 1921. Chinese government dictated value of yuan against U.S dollar In June 2010, China has fixed its exchange rate against the U.
S dollar to be 20 percent below its free market value, a practice known as “pegging” which is defined as fixing the exchange rate of a local currency against hard currency. The Chinese have an objective of keeping the yuan low, in order to ensure the goods and services are competitive in order to export. Timeline of Events Major events that influenced the currency market · Nixon Shock (1971) · Oil Crisis (1973) · Apartheid demise (1982) · Asian Financial crisis (1977) · The Gulf War (1991) · European debt crisis (2008) Relevant UN treaties: · 2015 Trade Facilitation and Trade Enforcement Act (and specifically the Bennet Amendment; Section 701) · The 1988 Omnibus Trade and Competitiveness Act (section 3004) Major Countries and Organizations Involved China Recently, numerous public officials and commentators claim that China has engaged in impermissible ‘currency manipulation’.
In October, 2008 President Obama has stated that China’s current trade surplus is because of to its manipulation of its currency’s value’. Over the past few years, various proposals have been made against China. At different times, China’s currency, the renminbi (RMB), has seen many different policy regimes; it has been pegged to the dollar, allowed to float, and it was deliberately devalued by the Chinese government.
Through all of that oscillation, the net result is that the Chinese currency has been, and currently still is, undervalued against the dollar compared to what it would be if left to market forces. U.N Conference on Trade and Development U.
N. agency has urged China to reject Western pressure to float its currency. In a policy brief, the U.N. Conference on Trade and Development, or UNCTAD, stated in an argument that market forces have caused currency chaos in the world, and leaving currencies to irrational market forcers will not help rebalance the global economy. The United States China is probably the most well-known currency manipulator today, as they have purchased previously unseen amounts of dollars to devalue the yuan and raise Chinese exports to an extremely competitive level.
Meanwhile, American exports are getting weaker, and as China possesses the biggest dollar reserves of the world. Previous attempts to solve the issue: Both the the International Monetary Fund (IMF) and the World Trade Organization (WTO) are approaching the issue of currency manipulation in their own way. The measures that WTO had on currency manipulation that were against subsidies failed to solve this issue. Therefore, new measures must be adapted and taken, to eliminate this issue. And this should be done through agreements made by the International Model United Nations. It seems that the WTO lack the power of interfering in any currency manipulation dispute because its out of its jurisdiction.
This is evident by their inability to issue any real resolution or judgment on any currency manipulation disputes. Possible Solutions The most suitable solution in this case to combat currency manipulation is a scenario that is similar to the post World- War II. Examining and looking into the destructions that currency manipulation has caused, has made the international community understand the immediate need for a prohibition of such tactics. If the international community was able to settle on the same conclusion, then they might after be able to develop a sufficient policy agency. The first step to address this complicated issue might be changing IMF´s Articles of Agreement that would guarantee the IMF more power in forcing countries not abiding to these rules. A second step to be taken, is by using the WTO´s power to clearly define currency manipulation in a more precise manner, in order for countries to be able to distinguish between currency manipulation and subsidy, and differentiate between them.
Although, this would require a transparency of countries’ financial affairs national reserve banks. Eventually, these measures that would be taken may raise awareness in the countries private economic sectors about the dangers and effects of currency manipulation.