08.07.2014 2

Why exchange rates matter to trade


By Robert Romano

One thing both advocates of free trade and opponents agree on is that exchange rates matter.

Supporters, such as President Barack Obama, said in 2010 to Senate Democrats that “One of the challenges that we’ve got to address internationally is currency rates and how they match up to make sure that our goods are not artificially inflated in price and their goods are artificially deflated in price.  That puts us at a huge competitive disadvantage.”

Opponents, such as author Lewis Lehrman, wrote in The True Gold Standard that “In the long run, free trade without stable exchange rates is a fantasy.”

In 2012, Republican presidential candidate Mitt Romney promised to slap duties on Chinese imports if the country did not allow its currency, the yuan, to float freely on markets.

So, everyone agrees, exchange rates matter. Why?

The lower a currency — such as the dollar or yuan — is valued, the cheaper that country’s exports will be on global markets, offering those goods a competitive advantage on price.

While there has been much diplomatically done to encourage China to allow the yuan float freely on markets, they have not yet fully done so. And why should they, since they would be essentially imposing a tariff on themselves?

That’s where Romney would have used duties on Chinese imports to “correct” the price.

Lehrman would go further than Romney, because as the world’s foremost gold standard advocate, he’s not a fan of floating exchange rates either, which he says promote trade wars. In his book he wrote of the “destructive effects of floating exchange rates which reduce long-term international and cross-border investment and employment opportunities in nations impacted by volatile variations in the value of national paper currencies.”

Instead, he proposed, “In providing a simple, overarching rule enshrined in law, mutual convertibility of national currencies to gold coordinates free and equitable international trade among the nations, limiting mercantilism and implicit trade wars promoted by floating exchange rates and undervalued exchange rates pegged to the dollar.”

In Lehrman’s mind, then, anything but a uniform international standard like gold is a recipe for protectionism. Gold, he answers, is the only way there can be free trade.

Obama, for his part, despite his rhetoric has not done anything addressing exchange rates, and his Treasury Department has refrained from labeling China a currency manipulator.

Perhaps that is just as well, since China’s only manipulation is to basically peg the yuan to the dollar. Right now, that peg is about 6 to 1. After all, what’s wrong with fixed exchange rates as a sovereign decision?

Nothing per se, but perhaps major trading partners that engage in the practice to help exporters ought to be put on notice. As it is, the U.S. is already in a trade war with China, it’s just not shooting back.

Or perhaps, if we really want free trade, we should adopt Lehrman’s approach and do away with manipulated, fiat currencies once and for all. It does not appear we can have it both ways.

Robert Romano is the senior editor of Americans for Limited Government. 

Copyright © 2008-2024 Americans for Limited Government