Currency Wars

Originally published in the Milken Institute Review. Reposted with permission.

January 1, 2013

The rules of global trade forbid countries from artificially boosting exports and curbing imports by manipulating the exchange rates of their currencies. But for many reasons, policymakers have been wary (more wary than presidential candidates, anyway) of pressing cases against abuses. That reluctance may be coming to an end, however, as the global recession slouches on and the shadow of chronic unemployment looms over industrialized economies.

What explains that traditional reluctance to pursue currency abuses? For one thing, more is typically at stake in bilateral relations than commerce. For another, some groups in the “losing” countries benefit from currency manipulation—Country A’s exporters’ unfair advantage translates into lower prices for consumers and higher profits for retailers in Country B.

Besides, economists argue, currency manipulation may determine which industries flourish, but it should not have much effect on the total number of unemployed in the long run. Last but not least, policymakers sympathize with some motives for currency manipulation—in particular, for building nest eggs of foreign currency to protect against economic (and military) shocks and for providing income for future generations when nonrenewable resources are depleted.

However, the politics and economics of what is appropriately dubbed “currency aggression” have been changing. Jobs do not seem to come back as quickly in the wake of economic downturns—and when they do come back, they leave a trail of economic and social dislocation. As the biggest nonaggressor, the United States is plainly suffering. I estimate that in 2011, currency aggression cost Americans more than two million jobs.