Report Detail Summary

Exchange Rates and the Terms of Trade

August 25, 2019

President Trump’s instincts are correct. However, the US beef with China should be the technology “transfer” not the currency manipulation nor the trade balance. Yet in spite of the evidence, the Trump administration dared to go where the Bush Administration did not, it designated China a currency manipulator. Currency manipulation result in a higher inflation rate in the manipulating countries without significantly altering a country’s Terms of Trade and or improving its trade balance. The danger of this policy is when the parties involved equate the currency manipulation with a term of trade and respond by imposing countervailing duties intended to reverse the currency manipulation. At that point, the tariffs and other restrictions have real effect on the economies. The outcome is just as bad for the countries who engage in retaliatory exchange rate policies against the so-called currency manipulators. In the end when all is said and done, they will only hurt themselves. If unchecked these polices lead to a trade war that could bring down the global economies. Just think of the Smoot Hawley -Tariffs which some believe contributed to usher the Great Depression,

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