Why Currency Rates Don’t Neutralize VAT Advantages

Economists will tell you that VATs are trade neutral because any trade advantage is neutralized by currency exchange rates.  Indeed, several government studies by GAO and CRS state that currency does so, and cite a paper by Krugman or somebody else from the 1990′s.

Of course, we are in a world of global currency wars now.  Rampant competitive devaluation causing persistent current account imbalances.  Currency is not the great equalizer, it is another powerful tool in the mercantilist toolbox.

So tell your less informed economist friends to read these papers.

1.  This paper by Joseph Gagnon of the Peterson Institute shows the extent of the currency manipulation problem, the effectiveness of government intervention in foreign exchange markets to impact exchange rates, and that the causal relationship starts with foreign exchange rate intervention and results in trade imbalances.

2.  These prepared remarks by Fred Bergsten doubles down on Gagnon’s findings, and basically shows the full extent of the currency wars, their impact and the risk to the entire international monetary system.

3.  This paper written for the Federal Reserve Bank of Boston shows how VATs can be used for “Fiscal Devaluation”… i.e. how to increase a VAT while decreasing payroll taxes to gain the same price differential trade advantage as from currency devaluation.

4.  This paper written by Brian O’Shaughnessy of Revere Copper, shows a U.S. manufacturers perspective of the trade advantage foreign competitors receive from foreign VATs.

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