Washington Post Does Not Understand How Currency Values Affect Trade

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Saturday, 18 September 2010 08:17

For some reason the people at the Washington Post cannot figure out how currency values affect trade. This is the only conclusion that can be drawn from a front page article that reports on Germany's success, relative to the United States, in exporting to China.

The article does not once mention the relative values of the euro and the dollar in talking about the surge in Germany's exports. At the risk of boring those who have taken an intro econ class, the relationship is very simple and fundamental.

China must buy the currency of the exporting country in order to buy the goods that are being exported. If the foreign currency costs more (measured in yuan, the Chinese currency), then the export costs more. The dollar has risen by roughly 20 percent against the euro since the start of the crisis. This means that to people living in China, the goods exported from the United States have risen in cost by 20 percent relative to the price of goods exported from Germany. It would be comparable to a situation in which China slapped a tariff of 20 percent on all goods exported from the United States.

A serious discussion of Germany's relative success in exporting to China would mention this change in currency values, just as it would mention a 20 percent Chinese tariffs on imports from the United States, if one existed. While Germany has pursued other policies that have helped to support its manufacturing sector, these have not changed appreciably in the last three years and therefore cannot explain the recent surge in exports.

It is also worth noting that Germany's growth since the crisis has actually been slightly slower than that of the United States. The reason why its unemployment rate is lower than the rate in the United States (it has actually below its pre-recession level) is due to Germany's labor market policy. Its efforts to encourage firms to retain workers, including its promotion of worksharing, have been enormously successful in sustaining employment so that German workers have not suffered in the same way as U.S. workers from this downturn. (It is also worth noting that Germany's unemployment rate is 6.9 percent using the standardized methodology in place in the United States, not the 7.6 percent reported in this article.)