China’s Currency Distracts From U.S.’s Policy Failings: View
Illustration by Bloomberg View
Republican presidential candidate Mitt Romney says that on “Day One” in office he would declare China a currency manipulator. So it’s safe to assume that were he president, he would sign the bill that passed the Democratic- controlled Senate last week to impose sanctions on China if it doesn’t free the yuan to appreciate against the dollar.
House Speaker John Boehner has said he will try to prevent a vote on the currency measure. We hope he succeeds. It’s unfortunate that the temptation to blame other countries for America’s self-inflicted woes is gaining bipartisan support.
Let’s be clear: We don’t favor China’s policy of keeping the yuan artificially weak, and thus making its exports cheaper. But blaming the U.S.’s sluggish economy on China’s currency policy is a diversion from more fundamental problems: the inability of political leaders to revive the economy in the short term (by helping homeowners with “underwater” mortgages, by investing in infrastructure and by providing tax incentives for employers to increase hiring), and in the long term with a budget-balancing plan.
The Senate-passed bill is similar to others offered over the past half-dozen years. Instead of identifying countries -- there’s really just one in mind -- that manipulate their currencies, this version would require the U.S. Treasury Department to spot exchange-rate “misalignment.” A country that fails to take corrective measures would face anti-dumping tariffs and would be barred from selling to the U.S. government.
Manufacturing Truth
And what if a U.S. maker of, say, steel bars used to reinforce concrete can make the case that the same product from China is underpriced because of the yuan? Maybe sanctions will make the American-made product more competitive. More likely, the business will migrate to producers in India, Malaysia or Indonesia, which will continue to underprice the U.S. manufacturer.
The truth is, the U.S. may never again be the lowest-cost maker of sneakers, clothing, kitchen utensils, the innards of iPhones and thousands of other goods for which inexpensive labor is key.
It’s also a stretch to conclude that a weak yuan is the sole source of the yawning U.S. trade deficit with China. In the past five years -- under pressure from the U.S. -- China has allowed its currency to appreciate 20 percent against the dollar. And the U.S.’s trade deficit with China? It hit a monthly record of $29 billion in August.
What’s more, at least half the final price of products labeled as “Made in China” goes to Americans, from retail clerks, to shippers and handlers, advertisers, engineers and designers, according to a study by the San Francisco Federal Reserve.
WTO Complaint
As for China, it would probably protest the measure, should it become law, by retaliating with trade sanctions of its own and lodging a complaint with the World Trade Organization. The WTO may well side with China: Its rules bar cash payments or price supports to subsidize exports, according to the Congressional Research Service, but an undervalued currency probably doesn’t meet that threshold. The International Monetary Fund can deem a currency “misaligned,” the same language used in the U.S. legislation, yet has no authority to impose sanctions.
China’s reluctance to let the yuan strengthen stems from the Faustian bargain the Communist Party has with its 1.3 billion-strong population: The party holds political power while ensuring that people find work in factories making goods for export. A suddenly stronger yuan would make those products less competitive on international markets -- and may lead to civil unrest if millions of Chinese suddenly found themselves unemployed.
America’s Banker
Letting the value of its currency rise quickly has another potential downside for China: The country is America’s biggest creditor, holding $1.2 trillion of Treasuries. A stronger yuan reduces the value of those holdings. To prop up the dollar, China keeps buying Treasuries, making it easier for the U.S. to finance its enormous $1.3 trillion federal budget deficit.
We recognize that China is far from innocent. It should move faster toward policies that increase domestic consumption and rely less on exports for growth. It should continue to let the yuan strengthen, which would reduce the cost of its imports, help contain domestic inflation and put more money in the pockets of Chinese consumers.
Yet a U.S. policy that hinders trade is self-defeating. If America’s leaders ever get serious about correcting the U.S.’s fiscal imbalances, they will be in a better position to impress on countries, such as China, the merits of free trade.
To contact the Bloomberg View editorial board: view@bloomberg.net.
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