Currency Manipulation: A Clarification
Currency manipulation has returned as a major issue in the debate over trade with the release of the text of the Trans-Pacific Partnership (TPP) negotiated by the United States and 11 other countries. The practice, by which some countries artificially suppress the value of their currencies in order to boost exports and curb imports, steals jobs in the United States when unemployment is significant. As the economy approaches full employment, the impact on jobs declines. When the US economy is at or above full employment, currency manipulation has no net effect on jobs.
In 2012, C. Fred Bergsten and I estimated that US employment would have been higher by between 1 million and 5 million jobs if currency manipulation were eliminated. This estimate has been widely cited recently in the renewed debate over trade. But the effect of currency manipulation on US employment is much smaller today for two reasons: First, many former manipulators appear to have stopped buying foreign currency assets recently, and some are even selling them (e.g., China). Second, the US economy is getting close to full employment and the Federal Reserve is getting close to raising the federal funds rate. A further decline in currency manipulation that pushed the dollar down would accelerate the Fed's tightening cycle with only a small temporary effect on US employment.
The main cost of currency manipulation when the United States is at full employment is that it displaces firms and workers out of the export sector into jobs in other sectors that are less productive and less profitable. This shift reduces the overall productivity of the US economy.
Currency manipulation can be a job-stealer when times are toughest, and it distorts the US and world economies even when times are good. It is important to protect against a return of currency manipulation. But we should not exaggerate its impact on the US economy right now.