Introduction international economic policy, but neither the U.S. government

 

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.

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    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.

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