The U.S has labelled several countries as currency manipulators but what does it mean and why does one country get that label?
What’s New?
Swiss investment banking company, UBS Group AG has said that Switzerland might be labelled as a currency manipulator by the U.S, adding that the country is already on a monitoring list along with Thailand and Taiwan.
What Does It Mean By Currency Manipulation?
Before we get into the detailed answer, you have to understand about supply and demand.
When there is a high demand for a certain product, its price becomes expensive because everyone wants to get their hands on it. Similarly, when its demand becomes lower, the price also drops.
The same thing happens with currencies as well. Let’s assume that you are Country A and other countries like to buy cars from your country because it is cheaper compared to their currency. (1 rupee in your country is 50 paise in these other countries). However, the more countries start buying cars from your country using your currency, the demand for your currency becomes higher. Thus, the value of your currency will also go up.
Now, 1 rupee in your country is 3 rupees in these other countries’ currencies, meaning that buying the cars from your currency has become expensive now. So, naturally, the demand for cars from your countries will go down. Since the demand for your cars has gone down, the demand for your currency will also decline, meaning that your currency’s value will also go down. These things happen in every country and these values tend to adjust themselves.
The Weaker It Is The Better
It is very obvious that people were buying Country A’s cars when the currency was weaker. So, you, as a country, would want more people to buy your country’s cars so that you can have a *trade surplus with other countries.
*Trade surplus is the amount by which the value of a country’s exports exceeds the cost of its imports.
But how does this help you?
- When your country exports more cars, it leads to the birth of more factories and more jobs
- When your country’s currency is weaker, people buy more and more products from your country as it is cheaper and this leads to the growth of your economy
The Unfair Advantage
When Country A’s currency is weaker, people will stop buying products from other countries because you are offering them at a much lower price. This leads to an imbalance in the global trade. The other countries will have a *trade deficit with your country.
*Trade deficit is the amount by which the cost of a country’s imports exceeds the value of its exports.
But how is this unfair?
- When countries import cars from Country A, the local factories in their countries will suffer, leading to job losses
- Since the value of their currency is not as low as Country A’s, their products might not have a good demand and this damages their economy
The Currency Manipulator Tag
If a U.S trade partner meets three assessment criteria, then that country is labelled as a currency manipulator by the U.S.
- Firstly, a significant bilateral trade surplus with the U.S that is at least $20 billion
- Secondly, a material current account surplus that is at least 3% of GDP
- Thirdly, continuous, one-sided intervention is reflected in repeated net purchases of foreign currency and total at least 2% of an economy’s GDP over a year.
After labelling a country as a currency manipulator, the U.S tries to solve it through bilateral talks.
The country which is known for manipulating its currency is China because President Donald Trump has said that China is purposefully weakening its currency. When you think about it, China exports a lot of goods and if Chinese yuan is weakened, countries will continue to import from China.
In conclusion, there is a thin line between supporting the currency and manipulating it. However, weak currencies help a country and so, they try to possibly weaken their currency during financial crises or any other difficult times if and when their currency’s value skyrockets.
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