Every now and again, policymakers express interest in cracking down on foreigners — particularly the Chinese government — who buy up stocks and bonds in the United States to keep their own currencies cheap and their exports high. Senator Chuck Schumer (D-N.Y.) sponsored legislation, which passed the Senate, authorizing tariffs against currency manipulators such as China. Just a month ago, Schumer attacked the Obama Treasury Department for not formally designating China a currency manipulator, a demerit which Mitt Romney promised to bestow during his presidential run.
In a new working paper, Joe Gagnon and Fred Bergsten at the Peterson Institute argue not just for import tariffs like those Schumer advocates, but for a full-frontal assault on countries that are manipulating their currencies, including many more targets than just China, which is actually getting better relative to past manipulation. Specifically, they want the U.S. to offer the eight worst currency manipulators — China, Denmark, Hong Kong, Korea, Malaysia, Singapore, Switzerland and Taiwan — an ultimatum: Stop manipulating, or else we'll do the following:
1. Buy up exactly as many assets in their currencies as they have in ours. If Denmark has $78 billion in dollar-denominated assets, as it did at the end of 2011, then we'll buy up 396 billion Danish kroner (the equivalent of $78 billion) worth of Danish assets to balance that out. That's a lot of Lego kits.
2. For countries where we can't do that, perhaps because there aren't enough Legos to buy, tax the earnings from dollar-denominated assets as punishment. If a Treasury bond is paying out $10 twice a year to a Danish bondholder, then the tax would force a portion of that, perhaps a big portion, to go back to the U.S. government.
3. Treat currency manipulation the same way we treat export subsidies for the purposes of imposing retaliatory tariffs. This is where Gagnon and Bergsten make common cause with Schumer. If Denmark is doing $78 billion of currency manipulation, then we'd be entitled to impose $78 billion in tariffs on Danish goods, just as we would if they were spending $78 billion on, I don't know, Lego subsidies.
4. Take the manipulators to the World Trade Organization (WTO), which could authorize even further punishments.
The hope is that these measures would stop currency manipulation, make the dollar less expensive, and thus promote U.S. exports. The effects, Gagnon and Bergsten argue, would be significant. Eliminating currency manipulation, they estimate, would reduce the value of the dollar by 10 to 25 percent. Taking the low-end figure, a 10 percent depreciation would, in the short run, boost GDP by 1.5 percent and create 2 million jobs. And it will stop a trend that's gotten fairly out of control in recent years:
But the risk is that Gagnon and Bergsten's policies would only provoke the targeted countries, leading them to respond with still more manipulation and/or tariffs on U.S. goods, setting off a full-fledged currency and trade war that just leaves all parties worse off. Gagnon and Bergsten argue that this is unlikely, but even in the absence of a full-fledged war, the plan would likely sour U.S. relationship with important regional actors like Malaysia, Korea and China, which could lead to less than salutatory outcomes in other domains. But for a 1.5 percent boost in growth, it just might be worth it.
Update: The original version of this post implied that the Gagnon/Bergsten paper called for a currency war against Kyrgyzstan. It doesn't. The Kyrgyz are safe for now.