As President Obama finishes up
his visit in China
, economists continue to ponder how to address one of the most crucial aspects of Chinese-American relations: China's currency policy towards the United States. As
China buys bushels of dollars while keeping its currency undervalued, analysts consider how to correct the resulting trade imbalance. In varying
tones of concern and outrage, economists explain why this is so
important and what we can do about it.
- Fighting the Undervalued Yuan Christian Science Monitor's Dean Baker proposes a solution. "Just as China can set a value of its currency against the dollar, the
US government can set a value of the dollar against the yuan. The
Chinese government currently supports an exchange rate at which the dollar can buy 6.8 yuan. This high value of the dollar
makes US goods uncompetitive relative to China's. To make US goods more
competitive, the US could adopt a policy through which it will sell
dollars at a much lower price, say 4.5 yuan," he writes. "It would send an important signal that the US government is in control
of its dollar destiny: Washington has the ability any time it chooses
to push the dollar down to a more reasonable level against the yuan.
- 'Ugly Confrontation' on Rigged Currency The New York Times's Paul Krugman fumes
that China undervalues their currency such that our eventual recovery
will work greatly to their advantage. "Despite huge trade surpluses and
the desire of many investors to buy
into [China's] fast-growing economy — forces that should have
the renminbi, China’s currency — Chinese authorities have kept that
currency persistently weak. They've done this mainly by trading
renminbi for dollars, which they have accumulated in vast quantities."
Meanwhile, U.S. "policy makers haven’t been able to generate enough
spending, public or
private, to make progress against mass unemployment. And China’s
weak-currency policy exacerbates the problem, in effect siphoning
much-needed demand away from the rest of the world into the pockets of
artificially competitive Chinese exporters. [...] Looking forward, we
can expect to see both China’s trade surplus and America’s trade
- 'Help Them Help Us' The New Republic's Noam Scheiber urges
us to consider China's domestic politics. "[S]olving these problems
isn't quite as easy as 'getting tough' with the Chinese. It also takes
some thinking about how we can help them help us, if you'll pardon the
cliche." He explains, "The problem is that investing in export-led
growth, as they have for
years, is a self-perpetuating cycle. It creates powerful domestic
constituencies that go nuts every time you try transitioning to a
different model. For example, one of the reforms China
has flirted with is lowering the valued-added-tax rebate it uses to
subsidize exporters. But the backlash has been intense," he writes. "I
think the Chinese leadership also understands that withdrawing
stimulus too abruptly would be a disaster, because it would send us
right back into recession and make us less likely to pay them back.
But, here again, they face huge political constraints at home."
- How We Make It Worse In the New York Times, Niall Ferguson and Moritz Schularick lament
the economic relationship they describe as "Chimerica" and its role in
the problem. "Given the bursting of the debt and housing bubbles,
Americans will have to kick their addiction to cheap money and easy
The Chinese authorities understand that heavily indebted American
consumers cannot be relied on to return as buyers of Chinese goods on
the scale of the period up to 2007. And they dislike their exposure to
the American currency in the form of dollar-denominated reserve assets
of close to $2 trillion. The Chinese authorities are 'long' the dollar
like no foreign power in history, and that makes them very nervous."
- But U.S. Maintains Upper Hand The Telegraph's Ambrose Evans-Pritchard insists
China isn't so mighty. "It is fashionable to talk of America as the
supplicant. That misreads the strategic balance. Washington can bring
China to its knees at any time by shutting markets. There is no
symmetry here. Any move by Beijing to liquidate its holdings of US
Treasuries could be neutralized – in extremis – by capital controls.
Well-armed sovereign states can do whatever they want. If provoked, the
US has the economic depth to retreat into near autarky (with NAFTA) and
retool its industries behind tariff walls – as Britain did in the 1930s
under Imperial Preference. In such circumstances, China would collapse.
Mao statues would be toppled by street riots."
- U.S. Shackled By Domestic Politics Dave Schuler of Outside the Beltway shakes his head
at the political calculations that push our politicians to make the
problem worse rather than betters. China's currency manipulation "has
been abetted by American politicians of both parties who’ve
shrewdly observed that borrowing [from China] has been politically less
raising taxes or curtailing spending," he writes.
- Risks for Asia In U.S. Reaction The Wall Street Journal warns that our reaction could cause disastrous bubbles in Asian economies. Asian nations "are getting a huge dollar liquidity kick from the carry trade, in
which people borrow U.S. dollars at exceptionally low U.S. interest
rates and invest them for higher returns elsewhere. As a result, Asia's stock markets are outstripping U.S. and European bourses by a country mile," they write. "The risk is more asset bubbles and misallocation of global capital."
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