would have a zero-net effect in the long run.

Allen: That’s what people have argued, but that’s in an ideal world that it would adjust. Whether or not that will happen in practice, I think, is still something that we don’t have a good sense of. I think if [the Trump administration does] something like that with Mexico, then it will potentially cause big problems because so much of world trade now is on supply chains. Really, a lot of what’s happening in Mexico is supply chains. If they get disrupted, then people can be very reluctant to invest in those kinds of things again. That could potentially have a very big effect.

I guess it’s tied up with how they want to renegotiate the NAFTA agreement; and I think we still don’t have too much idea what exactly their tactics on that one are going to be. There’s also the [border] wall, and paying for the wall, and all those issues bubbling away underneath some of these things. So, I think it’s going to be a while before we know how that plays out. But it is potentially disruptive, not just for Mexico, but for many other countries where people are using them as part of a supply chain.

[email protected]: China was a real whipping-boy for President Trump during the campaign. He talked about China’s currency being undervalued. Some analysts and critics said, well, that was true years ago, but it actually isn’t the case now. Although it is true, I think, that the Chinese currency has been depreciating somewhat against the dollar more recently, but probably for good, fundamental reasons. Can you talk about your view of how accurate the relationship between the dollar and China’s currency is now, and how much merit there is to what the administration has been talking about, regarding China?

“The euro is not controlled by Germany. If they could do anything, they would want the ECB to raise rates [and thus the value of the euro].”

Allen: My own view on the RMB-dollar exchange rate is that it depends a great deal on the capital account flows, as well as the current account flows. I think too much of the discussion focuses on the current account flows, and the deficit that the U.S. has with China. But what we’ve seen, as your question indicates, is that in fact in recent months there has been a weakening of the RMB as the dollar strengthened. So, the notion that they’re manipulating it is somewhat valid, but they’re manipulating to keep it valuable, rather than to keep it undervalued. I think that is, to a large extent, because of capital flows coming out of China. As long as that continues, it’s likely to be weak.

What we have to see is how capital account convertibility plays out in China. They’ve said they’ll do it, but the time frame is very important. And, as long as there’s money coming out in the kinds of quantities that there are, I think they’ll be reluctant to do it any time soon. So, my own view is that that’s the big issue on the RMB-dollar exchange rate.

[email protected]: Also, with Japan, there’s been some jawboning by President Trump about the currency differences. And then, perhaps coincidentally, there was an announcement by Japan that it was willing to make certain investments in the U.S. that would create hundreds of thousands of jobs. What are the merits of the argument that Japan is still — I say ‘still,’ because this was an argument that goes back to the 1980s — manipulating its currency against the U.S. dollar?

Allen: They do intervene more than most countries in the foreign exchange market, but I think this is more to smooth the movements, rather than to have a fundamental effect. The one major achievement of Abenomics was to move the exchange rate so that the yen did effectively devalue against the dollar. But I think that they really are trying to stimulate the economy, and that this was a side effect, rather than the main reason for doing it.

I would say that they aren’t manipulating their currency, and that the charges that the Trump team is making are not particularly valid, with respect to Japan.

[email protected]: I think back when Japan first instituted some of those changes, under Abenomics, that the International Monetary Fund (IMF) actually gave them the blessing to go ahead and do that.

Allen: Yes. I think the view was, they’ve had such a bad time for such a long time, that we should give them a free pass on that. But it’s an interesting one, because Brexit basically does the same thing for the pound. The pound has devalued substantially, and the economy’s now doing quite well — partly as a result of that, I think. So, these movements in exchange rates are driven by a wide range of things, and I think that the notion that countries are doing these things on purpose is probably not a valid one, in most cases.

[email protected]: The final case I wanted to chat about is Germany. I didn’t expect to be talking about Germany until President Trump came out and accused them of undervaluing their currency, which, of course, is the euro, which, of course, most of the continent uses. There have been criticisms that Germany has benefited from a relatively low euro, because it’s a big exporter, one of the biggest in the world. And so, if it had its own currency, that currency would have gone up a lot. And that would have balanced out its trade with the rest of the world. But also, Germany has been criticized for not spending more within the EU to take some of those gains, and to spread it around, as it were, and try to stimulate the rest of the EU.

But in any case, Germany doesn’t totally control the euro. So, what’s going on when you actually go head-on against Germany, and accuse it of manipulating its currency?

Allen: I think this is one of the most interesting questions — not just in this aspect, but also, of course, if you look at some of the other things that the Trump administration has been stressing. Like, spending at least 2% of GDP on defense for NATO members. Germany is also one of the biggest violators of that. They’re having a tremendous amount of pressure put on them, I would say.

In terms of the economic aspect, I guess I would be more sympathetic to them in the sense that the euro is not controlled by them. That’s controlled by the European Central Bank (ECB). And I would think, if they could do anything, they would want the ECB to raise rates. They’ve been complaining bitterly about the penalty that German savers have been facing because of the low interest rates the ECB is setting. And, of course, if they were to raise interest rates, the euro would probably appreciate significantly. So, I think it’s a misplaced charge.

My own view on, should they be spending more? I guess that’s a sort of a macroeconomic view, based on inflexible prices, and whereas there’s some merit to that in the short run, in the long run, I don’t think

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