If there’s one issue that can unite a politically divided and often dysfunctional Capitol Hill, C. Fred Bergsten believes it is the need for action against international currency manipulation. In his CIGI Signature Lecture, the renowned economic policy expert and Washington insider made a compelling case for the US to respond to the practice of countries intervening in international foreign exchange markets to keep their respective currencies weak and the US dollar strong.
For all the divisive gamesmanship in Washington, Bergsten noted that Democrats and Republicans have joined forces to create majority support in both the House of Representatives and the Senate, in their call for President Barack Obama to act.
“This is the only issue in the US in which there is there is bi-partisan, bi-cameral support,” Bergsten said.
The practice in question involves a country undervaluing its own currency — by buying US dollars and then investing them in bonds or treasuries — allowing it to amass large trade surpluses through cheaper exports. At the Peterson Institute for International Economics, where he is a fellow and Director Emeritus, Bergsten leads a research project that has identified 120 countries that are intervening in international foreign exchange markets. A handful of these countries do so to the extent that it is “egregious behaviour.” Bergsten said this gives currency interveners “a huge leg up in international competition,” while the result for the country being intervened against is a rising trade deficit, lower economic output and higher unemployment. He suggested that the currency manipulation of other countries, namely China, costs the US economy hundreds of billions of dollars annually and up to five million jobs.
With his country still engaged in a massive quantitative easing (QE) program, Bergsten acknowledged the criticism that many outside the US view QE as another form of currency manipulation. For Bergsten, the difference lies in the fact that QE is a domestic monetary policy with a clear and well-defined domestic focus, admittedly, with some spillover effects. Foreign currency intervention on the other hand directly impacts international pricing, he said.
Bergsten said currency manipulation has become a part of the international monetary system because of what he considers “the greatest single flaw” in international governance: the failure of those establishing the Bretton Woods system in the aftermath of the Second World War to include an enforcement mechanism for penalizing countries that engage in such tactics. Bergsten highlighted the unfortunate dichotomy of the International Monetary Fund (IMF) having clear rules on the issue but no means for enforcement, while the World Trade Organization (WTO) has an enforcement mechanism with “overly complex” rules for enacting it.
“Systemic reform is clearly required,” he said.
A novel method of addressing the issue is what Bergsten calls “countervailing currency intervention.” This would see the US respond to another country’s large-scale purchase of US dollars, by immediately purchasing the equivalent amount of that country’s currency, thereby maintaining the latter’s value. For countries that do not have convertible currencies for the purpose of buying and selling international financial assets, such as China, Bergsten recommends enacting discriminatory capital controls to prevent an excess accumulation of foreign reserves.
“I think if the US did it two or three times, other countries would know that they mean business and everyone will end up where they started,” Bergsten said.
Following his presentation, Bergsten was joined by Michael Horgan, Canada’s Deputy Minister of Finance, for a discussion moderated by CIGI President Rohinton Medhora.
Horgan appeared to play devil’s advocate, by countering Bergsten’s point on lost US jobs with a suggestion that perhaps China’s manufacturers were simply more efficient than their US counterparts.
Bergsten accepted Horgan’s assertion to a point. But he said that the scale on which China is intervening in international foreign exchange markets and undertaking monetary policies to undervalue its currency and keep its exports significantly less expensive is akin to “subsidizing Chinese job creation.”
“Big pricing differences of that type go a long way to determining market share,” Bergsten said. Topics in the audience Q&A session included: exchange-rate volatility versus sustained currency misalignment; the resistance of major US corporations to pressure their government to respond to currency intervention; and, the choices made by Canadian and US consumers.
Bergsten concluded that he, like Horgan, had heard encouraging signs from high-ranking policy officials in Beijing that China is considering steps to reform its monetary policy in a manner that would address the imbalance issue.
“There’s enormous scope for China to go that way,” Bergsten said. “What we need now is concrete policy action.”
For more information on C. Fred Bergsten, visit http://www.petersoninstitute.org/staff/author_bio.cfm?author_id=33.
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