Currency wars and conventional wisdom

Yesterday I received one of those "Q and A" e-mails that think tanks use to promote their views from the Carnegie Endowment yesterday. The first question was: "What is the danger that a currency war could break out?"

Obviously the premise of this question is that there is no such war at present. But wait a minute. The IMF says that China is manipulating its currency. That means that China is constantly buying dollars in the global currency markets in order to keep the dollar’s value artificially high versus the Chinese yuan. It further means that China is doing this in order to indirectly subsidize its exports and to accumulate large dollar reserves. Nor is China the only player of this game. South Korea, Taiwan, Singapore, and even, upon occasion, Japan also intervene in currency markets to be sure that their export industries remain "competitive."

The intervention is always aimed at keeping the value of those currencies versus the dollar somewhat lower than market forces would dictate. In other words, these countries are all subsidizing their exports into the U.S. market and into the markets of other countries like Canada or Australia or Norway, for example, that have freely floating currencies. This subsidization is a beggar-thy-neighbor  policy that aims to create jobs at home by expropriating those of the importing countries. It is a strike at the competing industries in floating currency markets that would be competitive in the absence of the currency manipulation.

Now what would you call this — a currency war maybe?  Well, according to Carnegie Encowment economist Uri Dadush, you’d be wrong if you did. Dadush says that while there is a significant risk of a currency war breaking out, we’re not there yet. Apparently that can only happen if the U.S. decides to play tit for tat.

An even better example was the story that I’m sure many of you saw on the front page of yesterdays New York Times business section titled, Few Jobs Seen in a Weaker Dollar. I was particularly interested in this story because it had run originally in the International Herald Tribune and had contained a quote from, well, me. Naturally when I saw it again in the Times, I turned eagerly to the inside jump page to see my name in print once again.  So you also know how disappointed I was to see that my name and quote had disappeared from the Times edit of the story.

According to the Times version all economists share the view that a weaker dollar — meaning no currency manipulation by China or others — would have little if any affect on either the U.S. trade deficit or U.S. job creation. So, whereas the Dadush was saying that we’re not yet in a currency war, the Times was saying that maybe there is a war, but even if the currency manipulators stopped their attack, the effect on the U.S. economy would be negligible. So, maybe we’re not at war, but if we are, don’t worry about it. This is the conventional U.S. economic wisdom as handed down by two pillars of the establishment.

The Times essentially said that exchange rates no longer have much effect on trade flows because global companies produce in most of the major markets into which they sell and do not change production locations in response to currency shifts.

In the original Herald Tribune article, I noted that exchange rates are prices and that to argue that prices don’t matter is to argue that capitalism doesn’t matter. Obviously, the apostles of the conventional wisdom at the Times thought my comment undercut the preferred story line too much and removed it. Or maybe they just had to cut the length of the article and my comments just inadvertently wound up on the cutting room floor. Who knows?  But it doesn’t really matter, because the story was so obviously incomplete to anyone at all familiar with global production and marketing as to make one wonder if there are any editors left at the Times.

Look, of course, global companies produce in a lot of different markets. Toyota produces in Japan and in the U.S. for example. But Toyota sells more cars in the U.S. than it produces in the U.S. and so do Nissan, Mercedes Benz, and BMW. Apple produces some things in the U.S., but the bulk of the products Apple sells in the U.S. are made in Japan, Korea, Taiwan, and China. If this were not the case, how would the United States have chronic trade deficits of over $600 billion? Does the Times think that Toyota would not move more of its production to the U.S. if the yen doubled in value versus the dollar? If Toyota did move more production here, would that no create U.S. jobs? What am I missing here?