Recently there has been a lot of political discourse about currency manipulation and its effects on international trade.
We often hear or read that a devalued currency is an advantage while being a disadvantage to countries.
Virtually never are we provided information on the “how or why” an advantage is conferred by devaluing a currency.
The biggest impact of currency manipulation is to confer a competitive advantage in terms of labor input. It does not provide an advantage for raw material input costs (e.g. commodities) as those prices as set on a global basis. By lowering one’s currency one pays a higher price for these input costs, offsetting any advantage. However, labor costs are still a significant factor that goes into processing and making a product.
Often times a currency manipulator will also want to “peg” its currency to the U.S. dollar, meaning the exchange rate is fixed. If the peg is artificially low and below fair market fundamentals, it will incentivize U.S. multi-national corporations to outsource to the pegging country because companies like predictability and do not want fluctuations in the exchange rate affecting day-to-day profitability.
This is why any discussion about raising the minimum wage must be contemplated within the context of international trade and currency exchange rates. While it is a morally just to demand a higher minimum wage, it matters little when one does not have a job in the first place. Ask any small business owner if he or she would appreciate “free help”. This is a no brainer. Anyone who says labor cost is not a factor is divorced from reality and clueless about basic economic principles.
