(本文翻譯自 陳冲 兩個漢堡的匯率故事 2021-04-26)
The Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States report, awaited by all parties, was finally released. It turned out to be a false alarm while countries have their own interpretations. Interesting is that since the report didn’t give a punch as the report doesn’t label many countries as currency manipulator but still some warning words, people think that Yellen has first-class political wisdom and skills. Taiwan occupies lots of pages in the report but the brief two paragraphs in the US Treasury Department’s Press release can summarize all: Taiwan met all three of the 2015 Act criteria for the period under review, but there is insufficient evidence to make a finding that Taiwan manipulates its exchange rate for either of the purposes referenced in the 1988 Act. The good transition and the slippery manner made people confused and even a correspondent sent a press release with the subject of Taiwan being labeled as a currency manipulator and later retracted it within half an hour as the correspondent found that Taiwan was not labeled this time.
Recently, four scholars published a book discussing the impact of the central bank’s interest rate and exchange rate policy on Taiwan’s economy and the price we pay for these policies. The book sparked arguments among many legislators supporting central bank. The exchange rate is a double-edged sword. Devaluing exchange rate of course is good to exporters but unfair to importers, consumers of imported goods, and tourists traveling abroad as if been charged with extra taxes. Taiwan is an importer of energy and raw materials. The burden of using oil and electricity has increased and so do the cost of imported commodities (including wheat, soybeans, and corn) and semi-finished goods. The exchange rate issue is extremely controversial and we should analyze it from a more objective and academic angle instead of a political one. The book also has fair argument about the formation of exchange rates and the love-and-hate exchange rate story between Taiwan and the US. I will just skip it here.
The exchange rate issue is complicated. Many people want to comment on the economic side effects of exchange rate appreciation and depreciation from the perspective of popular science. But unfortunately, seldom can interpret it using easy-to-understand examples related to people’s livelihood. The Economist magazine published the Big Mac Index in 1986, trying to use an informal way to measure whether exchange rates are overvalued or undervalued. Since the ingredients and raw materials of Big Mac are basically the same in various places, the price should theoretically be the same. If there is price gap between the price a Big Mac sold in a country and the reasonable one, the exchange rate is obviously distorted. This theory is not very accurate but, in all fairness, not too far from the truth. Moreover, 1986 is only 2 years before the US passed the Omnibus Trade and Competitiveness Act to determine who manipulates exchange rate. The world was in a heated discussion over the issue then and the index invented by the Economist based on the PPP (purchasing power parity) theory somewhat still maintained a certain level academically.
Taiwan first appeared in the Big Mac Index in 1994. At that time, the exchange rate was 26.4, and the NTD was undervalued by only about 0.06% which implied that the implied exchange rate was roughly the same as the real exchange rate. In the following years, the Big Mac Index showed that the exchange rate of USD/NTD was undervalued by 8.9%, and the gap widened all the way in the next few years. By 2008, it had been undervalued by 30.8% and even exceeded 40% in 2012. In the past six years, the average had been around 57%. In other words, if the price of a Big Mac is $5.50, people in Taiwan needs to pay for NT$72. The exchange rate is distorted or the consumers wronged.
In the early 2000s, the US tried to deal with exchange rate issue in accordance with the WTO approach as it joined the group. But in 2015, it passed the Trade Facilitation and Trade Enforcement Act and set three standards to evaluate whether trading counterparties manipulate the rate. The US put pressure on these counterparties through the biannual report and Taiwan has been put on monitoring list these years.
As of the end of March this year, the balance of the central bank’s NCD has amounted to 9.24 trillion, an increase of 1.5 trillion in just one year. Can we say that it’s the result of intervention? Of course, Taiwan’s consumers want to buy double hamburgers with same purchasing power of New Taiwan Dollar but is it really a good thing to pursue trade surplus and devalue exchange rate for the country’s competitiveness? Well, it needs stakeholders’ discussion. If it turns out that consumers, salaried employees and traditional industries, after full informed, still support the undervalued exchange rate which actually indirectly subsidize certain industries, just forget this two burgers story!
(Released on Appacus Foundation website, Apr. 26th , 2021)