But prices aren't meant to reflect "the cost of production". We are living under a free market, not marxism.
I agree that gov intervention is usually not "efficient". But it is useful, and mostly to poor countries to get the benefits of a devalued currency. However, when such countries develop themselves to reach a wealthy state of affairs, they can't maintain this devaluation. I really don't see this as a problem. If you are saying that this is bad because poor nations get more competitive with it, I can't see it as a "problem", but rather as a good "solution".
Whoah whoah whoah, who mentioned Marxism? That pseudoscience has nothing to do with this.
Firms will produce additional units of product until marginal cost equals marginal revenue. Firms that insist on producing at a point where their marginal cost exceeds marginal revenue will go out of business; firms that produce at a point where marginal revenue exceeds marginal cost will (if they're not a monopoly and are in a competitive market) fail as well because competition ensures total revenue at this point will not cover total cost (average plus fixed costs; think of these as cost per unit plus the overhead cost of running the firm). The contrasting forces of economies of scale and diminishing returns will tend to equalize prices everywhere in the absence of barriers to trade. If your industry is inefficient and has strongly diminishing returns to scale it's most economically efficient for you to produce less. If your industry is highly efficient and has less sharply decreasing returns to scale then you should produce more. This ensures the highest level of output. Any sort of state distortion such as currency manipulation "deceives" the invisible hand into allocating too many factors of production toward countries that distort.
Here's a pic. D=MR means demand = marginal revenue, ensuring that the economy as well as the firm produces as much of a product as buyers are willing and able to pay for.
As for the other points: being wealthy doesn't make it any harder to maintain currency manipulation; the developed Asian countries that practiced manipulation in the past still do so. Currency manipulation slows world growth, and in the long, long run that makes everyone poorer.
I really don't understand how you can say that production in China ought to cost the same as in the states, as if there was some physical law that forced this statement to be true. Labor costs in China are reaaaaaally cheap compared to the states. Shipping costs are nil. I can't see how your solution to tariff them is beneficial to anyone but to the governmental budget. So they devalue their own economy, rendering chinese as "slaves" to the rest of the world. How do you see this as an unfair advantage is beyond me. This is akin to a group of professionals undercutting everyone else's prices by living far worse than them.
Firstly, currency manipulation only lowers your wages in relative terms by increasing costs everywhere else. Sure, there is some wage competition that lowers wages in the US, but currency manipulation drives it back up. A cheaper renminbi means a relatively more expensive dollar and Euro.
To address what you said about costs- that is true, but things are more complicated. There's a difference between marginal and average costs. Marginal cost is the cost to produce one additional unit of output. Marginal costs ought to balance out; more resources should be allocated to more efficient economies with higher output per cost until they produce at the same marginal cost as everywhere else due to diminishing returns on investment. Again, this is why prices will equilibriate globally in the absence of trade barriers. Average costs however are not going to be the same everywhere because they are simply the total cost of production divided by the number of units produced. Efficient economies will have lower average cost in a reasonably undistorted market.
Let me give you a concrete example. Let's say you make money picking cherries. There's a tree with $5 worth of cherries on each branch. You go for the low-hanging fruit first, of course, since that's the easiest to get at. Your marginal revenue for picking all the cherries on the lowest branch is $5 and your marginal cost is zero since you can easily reach them with your hand. Eventually you pick all the cherries in easy reach and need to spend $4 per cherry on electricity for your cherry-picker to reach up to the next branch. Your marginal revenue is still $5 but marginal cost has gone up to $4. It's still profitable for you to pick cherries so you keep doing it. You soon pick all the ones on this branch and now need even more power to reach the next branch. You still get $5 in marginal revenue but have to pay $5 in marginal cost for the extra electricity. MC=MR and you are now indifferent to producing one additional unit of production; you will keep picking cherries and running your cherrypicker up to this point but no further because the fourth branch would require $6 of electricity to reach and you would cost the economy more than you were producing to reach it.
Now what if someone over the border (lets call him Bob) can pay half as much as you to pick cherries from an indentical tree with the same equipment just because their government prints money to keep their currency 50% undervalued? The power company will relocate because investors would rather give Bob $3 to pick cherries from the fourth branch than give you $4 to consume less power to reach the same number of cherries. Bob will keep producing past the fourth branch and hog all the electricity you could have used more efficiently.
That's uneconomic, and not how things are supposed to work.
Thanks a lot for the source, I'll learn a few things with it!
No problem. Google "effect of currency manipulation" or something and you'll get plenty more information. Here's a congressional report on Japan's practices, with options to get them to cut it out.
http://www.fas.org/sgp/crs/row/RL33178.pdfCurrency manipulation is really a small part of the problem though, since prices adjust most of the way regardless. Retaliating against manipulators is better than letting the problem fester for decades. But global trade imbalances have more to do with extremely low savings rates in the United States than anything else.
