Thoughts on trade policy and pegs

Lifted from comments. Vtcodger summarizes his thoughts on a layman’s approach to trade and trade policy:

1. It’s pretty clear that there is no protocol for determining if a currency is under or over valued relative to another or by how much. It’s all guesswork.

2. Foreign Exchange probably is not a marketplace that is efficient with regard to cost of goods. Other factors like perceived stability of currencies and speculative forces probably cause exchange rates to be (considerably?) different than they would be if they were set only by cost of manufacture, shipping, and similar trade related factors.

3. Attempts to deal with trade balances between individual pairs of countries in isolation are probably going to produce dubious results. (But that won’t keep folks from trying).

4. If one were to look at all the trade relationships on the planet, one would probably find that there is no set of values for the currencies that makes them all “fair”.

5. The expectation that revaluing the renimbi upwards will solve US trade problems is probably nuts. A small upward revaluation will probably help. But for every good, once some other nation (which will rarely be the US) becomes the low cost provider, the (Multi-national companies) will simply swich providers and the Yuan exchange rate will be irrelevant to trade in that product. Beyond a certain point, this is a lose-lose game for the US and China.