The U.S. Treasury Department should drop its report on whether our trading partners are manipulating their currencies, because currency manipulation isn't behind the large U.S. current account deficit, says Harvard economist Martin Feldstein.
The current account includes trade in goods and services, income and transfers. The deficit totaled $379.3 billion last year, or 2.3 percent of GDP.
The Treasury's latest currency report came out last month. It focused largely on the yuan, saying it's undervalued, but declining to accuse China of currency manipulation.
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"That ritual has been repeated for more than 20 years. . . . It is now time to bring it to an end," Feldstein writes in the
Financial Times.
"The entire exercise is based on the false premise that the U.S. current account deficit is caused by the exchange rate policies of foreign governments."
Current account balances are actually determined by domestic factors, he argues. A country has a current account deficit when its investment in equipment and structures exceeds its national savings, he says. That gap must be plugged with imports.
"The U.S. has a current account deficit because the national savings rate is very low," Feldstein writes.
"The U.S. Treasury would do better to focus on reducing America's future fiscal deficits so it no longer has to depend on the foreign current account surpluses that it now criticizes."
As for China, some experts are concerned that its effort to devalue the yuan could spark a regional currency war.
"With capital beginning to flow back to some emerging markets, a weaker yuan could increase pressures on other central banks, especially those in Asia, to prevent their own currencies from appreciating," Cornell University economist
Eswar Prasad tells The Wall Street Journal.
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