China and Currency ManipulationBy exploiting world currency markets, countries like China and Japan effectively subsidize their exports to the United States, and place a tariff on U.S. shipments to them. This manipulation is taking place on a massive scale. By some estimates, China’s yuan is undervalued by as much as 40 percent compared with the U.S. dollar.
China’s currency manipulation has contributed to the dramatic increase in the U.S. bilateral trade deficit with China, which now tops $295 billion a year. China has amassed foreign exchange reserves of more than $1 trillion, far surpassing any other nation’s reserves.
China’s currency manipulation also attracts foreign investment into China and away from American manufacturing facilities.When countries adopt artificial exchange rates not based on market forces, they not only exacerbate the U.S. trade imbalance, but they create global trade imbalances. Additionally, currency manipulation results in a sizeable difference in labor costs. This difference creates the illusion of a comparative advantage for a given country. Ultimately, currency manipulation is a subsidy that can put American manufacturers at an unfair disadvantage in the global marketplace.