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By Staff | Jun 12, 2015

The U.S. Treasury has long held the opinion that Beijing has refused to allow its currency to trade freely valued by markets because it wanted to manage the yuan’s value to its advantage.

China kept the yuan valued lower than it was believed that a free market would have valued it to grow its export economy. I think that is true.

Treasury never went so far however, as to officially declare China a currency manipulator, but always used the threat of such a declaration as leverage to get them to slowly free its currency. I would say that the approach worked as they did widen the band that it allowed the yuan to trade in and it took limited government intervention to keep it there.

Washington complained and Beijing did respond, not nearly enough to silence the criticism, but to the point where the International Monetary Fund just declared that the yuan is no longer undervalued as a currency. Many things impact currency value. China’s economic growth has slowed which means that it better fits the value of its currency. Other currencies such as the yen have weakened which increases the reflective value of the yuan. The country that has become the greater currency manipulator more recently is Japan.

First you have to define manipulation. Japan does float the yen while China doesn’t yet float the yuan. From that standpoint China would be the bigger manipulator. If however, you defined currency manipulation by Central Bank policy, then everybody is a currency manipulator.

The U.S. is becoming less so as it ended Quantitative Easing, while the Eurozone and Japan are still printing money fully intending to stimulate their economies with a flood of cash and credit weakening their currencies for the trade advantage. The U.S. Congress wants to intervene by giving itself the power to denote what is currency manipulation and who is doing it as well as the right to impose sanctions on who they determine are offenders. To me that would be like pulling the pin on a grenade and throwing it into the gearbox of the world economy.

It may not be running perfectly as it is or even far from it, but when is the last time Congress ever fixed anything? They would be the worst thing that could happen to the global economy. You need to google Smoot-Hawley and brush up on your history of what happened the last time that Congress thought that it should intervene in world markets in the 1930’s and note how well that turned out.

Congress never learns lessons from history and the currency manipulation bill that just passed the Senate 78-20 proves it. They want to attach this provision to Trade Promotion Authority and Trans Pacific Partnership passage where it becomes a poison pill. Herbert Hoover caved into the protectionists. I think Obama is smarter than that but we will see. The Fed has advised Congress not to enter the world of currency valuation and central banking, instead advocating for market forces for enforcement.

Congress will frankly not act in an even-handed, level-headed manner using such currency enforcement power to impose tariffs in the wrong way at the wrong time creating more chaos than they will solve. Congress should know its limitations and judging currency values is beyond them. Democrats call the currency bill “trade enforcement” with their support a prerequisite for support for TPA and TPP. It would give them cover with the unions who essentially oppose trade today.

“If a trade agreement is required to come back with a currency discipline that is enforceable through trade mechanisms, I don’t think there is another country in the world that would agree to that,” Mr. Lew said at a Bretton Woods Committee conference in Washington. “It’s a poison pill in terms of getting agreement on TPP.” The President should veto this bill. If the currency provision is included as part of TPP then it would torpedo it which is what the protectionists actually want.

The currency manipulation provision is a back door way to killing any new trade agreements. This flirts with the trade policy that put the global economy through hell in the 1930’s. You wonder, “What idiot in the 1930s would have voted for Smoot-Hawley?”, but there were 78 idiots in the U.S. senate just like them a few days ago. History rhymes. Congress has a tendency to enact fixes for things that are no longer a problem. I don’t think that currency manipulation is at the top of the Fed’s or IMF’s list for issues disrupting and slowing the global economy. What would help the U.S. economy more than anything would be for Congress to address entitlement and fiscal policy. That is too hard for them so they focus instead on something they think that they call sell to the public looking for scapegoats to blame the slow growth on.

The currency manipulation bill is a bone that they think that they can throw to divert public attention away from their failure. I expect that was what it was about when they enacted the Tariff Act of 1930 that raised tariffs on 20,000 imported goods to record levels. Other countries of course retaliated, trade collapsed and they had a “mell of a hess.” Imposing tariffs for perceived currency manipulation would provoke a very similar response and result. Smoot-Hawley lengthened and deepened the Great Depression and the currency bill would give this Congress the ability to repeat history by derailing the recovery from this global recession.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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