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Manipulating currency to gain an unfair competitive advantage is already prohibited for members of the IMF and WTO, but the prohibitions lack teeth. The solution is simple: strong and enforceable currency rules must be included in all future trade agreements.
That means a country that devalues its currency can reduce its deficit because of the strong demand for cheaper exports. Although currency manipulation is not illegal, different types of manipulation such as stock and market manipulation generally are illegal.
Since the 1988 Act was enacted, the U.S. has designated the following countries as currency manipulators: South Korea in 1988, Taiwan in 1988 and again in 1992, and China from 1992 until 1994. India was added to the list in 2017 for 'questionable foreign exchange policies'.
What is currency manipulation, and why does it happen? Essentially, it is when a country sells its own currency and buys foreign currency usually U.S. dollars to weaken its currency and gain a competitive advantage.
China directly affects the U.S. dollar by loosely pegging the value of its currency, the yuan, to the dollar. China's central bank uses a modified version of a traditional fixed exchange rate that differs from the floating exchange rate the United States and many other countries use.
Economists usually use a narrower definition of manipulation. They say that it occurs if a country that runs a large overall trade surplus buys foreign currency, often dollars, to keep its currency from rising in value, because that weaker currency gives its exporters an edge.
Simply explained, in order to weaken its currency, a country sells its own currency and buys foreign currency usually U.S. dollars. Following the laws of supply and demand, the result is that the manipulating country reduces the demand for its own currency while increasing the demand for foreign currencies.
By evaluating its currency, the Asian giant lowered the price of its exports and gained a competitive advantage in the international markets. A weaker currency also made China's imports costlier, thus spurring the production of substitute products at home to aid the domestic industry.
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