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Tuesday, November 19, 2013

Current Debates over Exchange Rates: Overview and Issues for Congress

Rebecca M. Nelson
Analyst in International Trade and Finance

Exchange rates are important in the international economy, because they affect the price of every  country’s imports and exports, as well as the value of every overseas investment. Following the global financial crisis of 2008-2009 and ensuing economic recession, disagreements among countries over exchange rates have become more widespread. Some policy leaders and analysts  contend that there is a “currency war” now underway among certain countries.

At the heart of current disagreements is whether or not countries are using exchange rate policies to undermine free markets and intentionally push down the value of their currency in order to gain a trade advantage at the expense of other countries. A weak currency makes exports cheaper to foreigners, which can lead to higher exports and job creation in the export sector. However, if one country weakens its currency, there can be implications for other countries. In general, exporters and firms producing import-sensitive goods may find it harder to compete against countries with weak currencies. However, consumers and businesses that rely on inputs from abroad may benefit when other countries have weak currencies, because imports may become cheaper.

The United States has found itself on both sides of the current debates over exchange rates. On one hand, some Members of Congress and U.S. policy experts argue that U.S. exports and U.S. jobs have been adversely affected by the exchange rate policies adopted by China, Japan, and a number of other countries. On the other hand, some emerging markets, including Brazil and Russia, have argued that expansionary monetary policies in the United States and other developed countries caused the currencies of developed countries to depreciate, hurting the competitiveness of emerging markets. More recently, however, emerging-market currencies have started to depreciate, and now there are concerns about emerging-market currencies becoming too weak relative to the currencies of some developed economies.

Through the International Monetary Fund (IMF), countries have committed to avoid “currency manipulation.” There are also provisions in U.S. law to address “currency manipulation” by other countries. In the context of recent disagreements, neither the IMF nor the U.S. Treasury Department has determined any country to be manipulating its exchange rate. There are differing views on why. Some argue that countries have not engaged in policies that violate international commitments on exchange rates or triggered provisions in U.S. law relating to currency manipulation. Others argue that currency manipulation has occurred, but that estimating a currency’s “true” or “fundamental” value is complicated, and that the current international financial architecture is not effective at responding to exchange rate disputes. 

Policy Options for Congress 

Some Members of Congress may consider addressing exchange rate issues because they are concerned about the impact of other countries’ exchange rate policies on the competitiveness of U.S. products. Recently, concerns have been raised about the impact of Japan’s economic policies on the value of the yen, and the implications for the U.S. economy. However, there are a number of potential consequences from taking action on exchange rates that Congress might also want to consider. For example, U.S. imports from countries with weak currencies may be less expensive than they would be otherwise; countries may retaliate after being labeled a currency  “manipulator”; and tensions over exchange rates could dissipate as the global economy strengthens.

If Members did decide to take action, they have a number of options for doing so. Options could include urging the Administration to address currency disputes at the IMF and in trade agreements, or passing legislation relating to countries determined to have undervalued exchange  rates, among others. Two bills have been introduced in the 113
th Congress related to exchange rate policies in other countries (H.R. 1276; S. 1114). Representative Levin has also released a proposal for addressing currency issues in the Trans-Pacific Partnership, a proposed free trade agreement that the United States is negotiating with Japan and 10 other Asia-Pacific countries.

Date of Report: November 12, 2013
Number of Pages: 32
Order Number: R43242
Price: $29.95

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