Interest groups in the United States have focused on the possibility of including provisions in trade agreements with the intent of countering currency manipulation. The concern is that another country may choose to reduce the value of its currency relative to the U.S. dollar in order to encourage its businesses to export more goods to the United States. Such currency realignment also would tend to make it more expensive for the devaluing nation to import products from this country.
It’s true that an adjustment in currency exchange rates – regardless of the reason for the adjustment – can have an effect on trade flows. U.S. industries that export to foreign customers, or compete with imported goods in the domestic marketplace, understandably would prefer that currency relationships not become skewed against their commercial interests. Currency stability improves the business climate by making it easier to build long-term relationships with customers and suppliers.
However, currency exchange rates have fluctuated throughout recorded history. Sometimes those changes may be driven by a government’s conscious desire to devalue its currency. More often the variability in exchange rates reflects fundamental economic realities. Economies that experience growing productivity and rising prosperity should not be surprised to find that market pressures cause their currencies to strengthen. The reverse is true for countries that are growing slowly or not at all.
A shift in exchange rates changes a country’s “terms of trade,” which is a term used by economists to describe the ratio of a country’s export prices to its import prices. From a U.S. perspective, if another country sets its currency at an artificially low level relative to the dollar, the U.S. terms of trade will improve. The United States will be able to obtain a greater value of imports for the same value of exports. Exporting the same number of airplanes and soybeans as before will pay for the importation of larger quantities of shoes, coffee, and automobiles.