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'Currency Manipulation' and World Trade


Robert W. Staiger


Stanford University; University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER)

Alan O. Sykes


New York University School of Law

June 13, 2008

Stanford Law and Economics Olin Working Paper No. 363
Rock Center for Corporate Governance Working Paper No. 43

Abstract:     
Central bank intervention in foreign exchange markets may, under some conditions, stimulate exports and retard imports. In the past few years, this issue has moved to center stage because of the foreign exchange policies of China. China has regularly intervened to prevent the RMB from appreciating relative to other currencies, and over the same period has developed large global and bilateral trade surpluses. Numerous public officials and commentators argue that China has engaged in impermissible "currency manipulation," and various proposals for stiff action against China are now pending on Capitol Hill. This paper clarifies the theoretical relationship between exchange rate policy and international trade, and addresses the question of what content can be given to the concept of "currency manipulation" as a measure that may impair the commitments made in trade agreements. The analysis goes to the proper relationship between IMF obligations and WTO obligations and to the question whether trade measures can be an appropriate response to exchange rate policies. Our conclusions are at odds with much of what is currently being said in Washington. For example, it is often asserted that China's currency policies have real effects that are equivalent to an export subsidy. In fact, however, if prices are flexible the effect of exchange rate intervention parallels that of a uniform import tariff and export subsidy, which will have no real effect on trade, an implication of Lerner's symmetry theorem. With sticky prices, the real effects of exchange rate intervention and the translation of that intervention into trade-policy equivalents depend critically on how traded goods and services are priced. We show how the effects differ, according to whether exporters invoice in the local currency of the producer, in the currency of the buyer, or in a "vehicle" currency such as dollars. The real effects of China's policies are thus potentially quite complex, are not readily translated into trade-policy equivalents, and are dependent on the time frame over which they are evaluated (because prices are less "sticky" over a longer time frame). Accordingly, we are skeptical about many of the policy responses now under consideration in Washington both on economic and legal grounds.

Number of Pages in PDF File: 44

Keywords: International Trade, WTO, China, currency manipulation, subsidies

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Date posted: June 30, 2008 ; Last revised: October 21, 2010

Suggested Citation

Staiger, Robert W. and Sykes, Alan O., 'Currency Manipulation' and World Trade (June 13, 2008). Stanford Law and Economics Olin Working Paper No. 363; Rock Center for Corporate Governance Working Paper No. 43. Available at SSRN: http://ssrn.com/abstract=1151942 or http://dx.doi.org/10.2139/ssrn.1151942

Contact Information

Robert W. Staiger
Stanford University ( email )
Stanford, CA 94305
United States
University of Wisconsin - Madison - Department of Economics ( email )
1180 Observatory Drive
Madison, WI 53706
United States
608-262-2265 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Alan O'Neil Sykes (Contact Author)
New York University School of Law ( email )
40 Washington Square South
New York, NY 10012-1099
United States
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