Signature Assignment Part 1

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Brief Literature Review Draft

Student Name

Professor Name

Course Title

Date

Literature Review

Introduction

Report released by CNN explicitly explains the subject of currency manipulation in a diverse way. According to Censky, (2010), currency manipulation is the act of changing the currency value against other currencies instead of leaving it free to fluctuate following the dynamics in the global market Censky, (2010), currency manipulation has a significant impact on the local economy. It is defined by the country’s currency value against the international standards and the exchange rate used.

Katz, (2015) argues that, a country that is actively involved in exports and import has higher changes of facing the economic currency exchange challenges that can prompt manipulation of currency. As outlined in the CNN reports, China is perceived to be on the forefront for currency manipulation. This is report comes as a result of currency valuation report where the Chinese Yuan dropped significantly in 2016 following the US government action on the country’s export surge (Censky, 2010).

Currency manipulation history

The history of currency manipulation streams as early as 1998 when the Chinese government rolled its export trade into the United States following the unification of US and Chinese policies. The first significant of U.S. trade and current account deficits in the post-war era occured in 1971. They were caused, in part, by a series of competitive devaluations by major trading partners in Japan and Europe in the 1960s.

In 2005, the Chinese government reformed its exchange rate system policies. It announced that the RMB would no longer be pegged, and that the RMB exchange rate would become “adjustable based on market supply and demand with reference to exchange rate movements of currencies in a basket” containing various currencies of major developed countries.

From 1947 to 1971, the United States operated under a fixed exchange rate system based on the gold standard, which committed the United States to exchange dollars for gold at $35 per ounce under the Bretton-Woods system of fixed exchange rates. On August 15, 1971 President Nixon suspended the convertibility of gold and imposed a 10% surcharge on all imports (Stewart and Drake 2009).

According to Staiger, & Sykes (2008), the Nixon administration strategized measures aimed at pushing Japan and the members of the European Community to eliminate and revalue the trade boundaries that initially existed. The elimination was a strategic measure to remove those countries with fixative track records and additional contributions to common defense projects by the U.S. allies. Before the end on 1971, the European countries and Japan stood on the agreement to revalue forcing the Nixon to suspend the important surcharge. The following year were significantly impacted with numerous transformations leading to the elimination of Bretton-Woods and gold standard resulting to elevation of U.S. exchange rates.

Currency manipulation reports Treasury was first required to make semiannual reports on economic and exchange rate policies under the Omnibus Trade Act of 1988. Since 1988, Treasury has identified three countries as currency manipulators: Taiwan, Korea, and China, with Taiwan cited in 1988 and again in 1992. Each citation lasted for at least two six-month reporting periods, while China’s lasted for five periods, ending in 1994 (Sanford, & Library of Congress. 2007).

Presently, the U.S. Treasury is poised to render a verdict on President Donald Trump’s claim that China is manipulating its currency as a trade war between the two nations intensifies and rattles markets. These claims are alleged on the Chinese 1994 manipulation behavior which prospectively affected the Treasury Department. However, following the some recommendation from the Treasury staffs, China did not meet the criteria to be labeled as a currency manipulator.

Apart from China, some of the countries named as key global currency manipulators include South Korea, Japan, and Thailand. China has received a great amount of attention for its exchange-rate policies, but China is not the only state engaging in such policies. These countries exhibit significant economic valuation activities on the global platform with regard to trade and exchange policies (Bergsten, 2017).

Apart from the four, Bergsten, and Gagnon, (2012) opens more insight currency manipulation activities practiced in the Middle East. India is mentioned among the greatest currency manipulators following their currency value in the global economy. The question surrounding Middle East currency manipulation activities, according to the research findings, is concerned with trade activities and economic trade factors practiced by the countries.

The primary driver for currency manipulation is still unknown, but however, some research accords the malpractices to the imbalance in the value of dollar to the local currency. Also, the economic activities performed by the countries imposed a significant challenge to the global economic especially when there is devaluation I the local country’s economy in comparison to the global currency. For a country like China, “Politicians often decry currency manipulation in campaign speeches, congressional committee meetings, and debates to prove to constituents that they will be tough on countries trying to cheat the free market” (Hassan, et al 2016).

Benefit of currency manipulation

However beneficial it might be to the stakeholders, currency manipulation has significant impact to the both the local government and global market. As per Jaber, & Jaber, (2017), “since trade happens through the exchange of money, currency can be as important an influence on trade as the qualities of the traded goods or services themselves.” Staiger, & Sykes, 2008) argues differently stating the involvement of the government in subduing the currency market export. According to him, the practice violates the principles of free trade and force the market to ignore normal pressures of supply and demand. Staiger, & Sykes assertions maybe faced-out by Sanford, (2008) perception on the support for free trade. According to him, the free trade supports US exports and American Jobs, but free trade in goods and services requires free trade in currency.

Currency manipulation is illegal since it involves artificial reduction of prices allocated on exports and then flooding other economies with those exported products. The practice may be benefic ial to the consumer but has long term impact to the global economy and the local producers. It involves violation of the international exchange rate policies and affects the economies through imposing of extra charges to the stated currency rates.

Effect of currency manipulation to the global economy

Manipulation of currency, as explained by Katz, (2015), has significant implication to the US economy which determines the dynamics in the global economy. As reported by Jaber, & Jaber, (2017), a country like China has stimulated a significant level of imbalance in the US-China economic platforms. The relationship between the exchange rate policy and international trade is a question of concern on the global market.

In support to Katz, assertions, Nelson, (2013), goes further to explain that “if prices are flexible the effect of exchange rate intervention parallels that of a uniform import tariff and export subsidy, which will have no real effect on trade, an implication of Lerner's symmetry theorem.” (Nelson, 2013), The trade policies and trade ties are some of the long-term implication arising from the equivalent economic crises.

Control measures for currency manipulation

While the implication are still impounding, various legal and legislative institutions are taking shape to control the manipulation process that has deeply rooted on the global market. Countries involved in activities are on the look to ascertain the regard to global currency policies (Wong, 2017). According to the US Treasury Department, the Trade Facilitation and Trade Enforcement Act of 2015 should take the lead in publicizing awareness to the local governments and their role in controlling the activity (Sanford, & Library of Congress 2007).

The US Treasury Department, since 2015, is performing a three criteria analysis involving material current account surplus, significant bilateral trade surplus and the persistent, one-side interventions with regard to foreign currency exchange activities. Also, the US government is lobbying for political involvement in the control of the manipulation process. According to Wong, (2017), the US is lobbying the targeted governments to take heed for their currency globalization through establishment of legislative policies.

In the most recent report on the exchange rate policies of America's largest trading partners, the Treasury declined to name China, or any country for that matter, a currency manipulator. Instead, as it did in April, six countries made the monitoring list: China, Japan, Korea, India, Germany, and Switzerland.

Current currency manipulation trends

China

China has often been blamed of keeping the its yuan artificially week while making its exports cheaper. Also, renminbi, another currency, has been tumbling down over the year at more than 9 percents against the dollar. The US government, through Trump, is greatly concerned about the depreciation. It is therefore making necessary strategies to ensure that the currency is used as a competitive devaluation in order to increase its value against the dollar. The yuan’s drop has been fueled at least in part by market forces from the trade dispute, according to Mark Sobel, a former U.S. Treasury official who worked at the department for nearly four decades (Glaser, & Viers, 2017).

During a meeting held by the IMF, the People’s Bank of China Governor Yi Gang alleged the Chinese government doesn’t want to make use of its currency a tool to deal with the trade conflict following the current war on tariff. Despite all this, the White House is mounting more pressure on the Chinese Mnuchin for public shame.

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Figure 1.0

More countries scrutinized

According to the US Treasury, the number of countries under examination may be significantly increased. This expansion targets countries such as Thailand, Russian, Vietnam, Ireland, Indonesia, or Malaysia. All this countries are strategically on target following the active trade activities that have been on increase in the recent year with the US government. As stated by Shaikh, & Weber, “Expanding the list would be a clear signal of intent that the administration wants greater transparency on the currency policy of key trading partners, said Viraj Patel, a currency strategist at ING Groep NV in London. “Implicitly it also signals the intent to avoid ‘too strong’ a dollar in the medium-term and this is a subtle but important shift in dollar policy that shouldn’t be taken lightly.” (Shaikh, & Weber, 2018).

American largest trade partnership (key targeted currency manipulators)

Total trade in descending order

China

Chinese Yuan

$428 Billion

Canada

Canadian dollar

416 Billion

Mexico

Mexican peso

405 Billion

Japan

Japanese yen

143 Billion

Germany

Euro

123 Billion

S.Korea

South Korean won

84 Billion

U.K.

Pound sterling

83 Billion

France

Euro

58 Billion

India

Indian rupee

58 Billion

Italy

Euro

52 Billion

Taiwan

New Taiwan dollar

49 Billion

Brazil

Brazilian real

47 Billion

Netherlands

Euro

47 Billion

Ireland

Euro

45 Billion

Switzerland

Eswatini

42 Billion

India

India was one country unexpectedly added on the U.S. Treasury watch list. According to the Treasury findings, the country has significant trade surplus with the United State with increased purchases of foreign currency in the previous years. Currently, the country has engaged in opposite trades activities with the Reserve Banks of India with an extensive financial expenditure of over $26 billion used in trying to shore up the rupee. This resulted to the worst performing major currency in 2018 (Harding, 2017).

Germany

Trump has criticized European Union countries for “manipulating their currencies and interest rates lower.” Germany, which has been on Treasury’s monitoring list since April 2016, has faced the toughest criticism from Trump and the Treasury over its large current account surplus (Shaikh, & Weber, 2018).

Thailand

Shaikh, and Weber, (2018) states that if Thailand is added to Treasury’s twice-yearly review, analysts widely agree that it could be branded a currency manipulator because it meets all three criteria set by Congress.

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Conclusion

To sum up, currency manipulation has aggregated foreign exchange reserves following the increased foreign participation in the activities. Listed among the leading manipulators globally, China has intrigued into diverse exchange rate reserves implication legal, ethical and economic issues both to the local government and international trade policies. Two most important organizations that should square their trace on controlling the manipulation exercises include International Monetary Fund and World Trade Organization. “One criterion for being labeled a currency manipulator is a trade surplus with the U.S. of $20 billion or more. India’s was at $22.9 billion in 2017.”

Reference

Bergsten, C. F. (2017). Currency Manipulation and the NAFTA Renegotiation. The International Economy, 31(3), 30.

Bergsten, C. F., & Gagnon, J. E. (2012). Currency manipulation, the US economy, and the global economic order (pp. 12-25). Washington, DC: Peterson Institute for International Economics.

Censky, A. (2010). What is currency manipulation, anyhow. CNN Money, 11.

Glaser, B. S., & Viers, A. (2017). TRUMP AND XI BREAK THE ICE AT MAR-A-LAGO. Comparative Connections: A Triannual E-Journal on East Asian Bilateral Relations, 19(1).

Hassan, T. A., Mertens, T. M., Zhang, T., & National Bureau of Economic Research,. (2016). Currency manipulation.

Jaber, M., & Jaber, K. (2017). Currency Substitution and Price Endings: Right Digit Effect. Journal of Global Marketing, 30(4), 238-255.

Katz, R. (2015). The Myth of Currency Manipulation. The International Economy, 29(3), 40.

Nelson, R. M. (2013). Current Debates over Exchange Rates: Overview and Issues for Congress.

Reilly deLutio, C., Trostel, P. A., & Center, M. C. S. P. (2016). 2016 TRADE POLICY ASSESSMENT.

Sanford, J. E., & Library of Congress. (2007). Currency manipulation: The IMF and WTO. Washington, DC: Congressional Research Service, Library of Congress.

Staiger, R. W., & Sykes, A. O. (2008). "Currency manipulation" and world trade. Cambridge, MA: National Bureau of Economic Research.

Wong, C. S. (2017). Regulating Currency Manipulation: Political, Legal and Economic Barriers to Reform. Journal of World Trade, 51(4), 691-710.

Harding, R. (2017). Donald Trump’s Anger at Asian Currency Manipulators Misses Target. Financial Times.(February 12). Available at: https://www. ft. com/content/d2aeb4bc-ef71-11e6-930f-061b01e23655 (Accessed February 16, 2017).

Shaikh, A., & Weber, I. (2018). The US-China Trade Balance and the Theory of Free Trade: Debunking the Currency Manipulation Argument (No. 1805).

Ridley, D. 2012 The literature review: A step-by-step guide for students. Read Chapter 8: Being Critical

Bloomberg, L. D., & Volpe, M. (2008). Developing and presenting the literature review. http://srmo.sagepub.com.proxy1.ncu.edu/view/completing-your-qualitative-dissertation/SAGE.xml Review Chapter 2

Appendix

1. Graph 1.0………….. IMF Report on Chinese Currency Manipulation Chart

2. Table 1.0…………..List of Countries involved in currency manipulation total trade in descending order

3. Graph 1.1………… Currency manipulation report for Thailand

4. Graph 1.2…………..Currency manipulation trend since 1995 to 2019