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Den of Thieves

Endlessly Mugged by China’s Manipulated Currency, U.S. Did Nothing

Part 1 of a series.

For decades now, first with Japan and to a much greater extent with China, we have allowed globalization and notions of free trade to permit cheating countries to hollow out American industry and contribute to an American future that looks increasingly bleak. It will only worsen on our present course. With China it began with clothing and household goods, then electronics, the green industries that we were supposed to pioneer, and over the horizon it will be autos and planes.

Xi Jinping’s visit to the United States gives an added boost to increased attention to the China problem. The Chinese presidential dauphin may find it politically expedient to show his toughness when he takes office and raise the volume of retaliatory threats against the United States lest we take any actions to restrict trade.

In this series we cover our troubled relations with the emerging eastern superpower. America needs to re-focus. Our preoccupation with the Middle East and Central Asia has been a costly distraction from the most important determinant of this country’s future in the world: China.

dumbing down the yuan

Underpinning all is currency manipulation, our topic in this post. Artificially low price is built into everything exported to the United States. Over the last decade it is the most pervasive cause of disequilibrium between the two trading partners. China has kept the yuan anchored to the dollar, keeping its value well below and preventing it from finding its true market value. That way a dollar buys more Chinese goods. Even when the value of the dollar dropped in the crash, the yuan falsely rode down with it in parallel. That has led us to buy that much more and beggar our own industries, while the Chinese built a huge reservoir of claims against the dollar, currently estimated at $1.2 trillion.

Until recently, China has made only a few grudging upward adjustments to the value of the yuan despite a chorus of protests from many nations. A recent New York Times article says that over the years there has been a 40% rise in the yuan's nominal value. But the Peterson Institute has said the yuan has been undervalued by as much as 40% during the period; a 40% rise from that low point would still leave it 15% to 20% undervalued. And so much damage has already been done to the U.S. economy.

Our leaders cower in fear of how the Chinese might retaliate if we declare that they manipulate their currency and erect tariffs to arrive at the correct value of their goods. By law, the Treasury Department twice a year identifies countries that manipulate their currency to create an unfair trading advantage. But with China, year after year, Treasury has pretended not to see the obvious and come short of making an accusation. In his 2009 confirmation hearing, now Treasury Secretary Timothy Geithner said that President Obama believed China was manipulating its currency, but quickly walked that back. We haven’t heard that from him since.

He has company. Last October, the Senate passed a bill 63 to 35 to require Treasury to order the Commerce Department to impose tariffs on a mix of Chinese products if Treasury finds that China is improperly valuing its currency. Despite 16 Republicans crossing the aisle on that vote, Senate Majority Leader Mitch McConnell was strongly against the bill, even to the extent of attempting to subvert it by cynically attaching to it another bill he knew would not pass.

In the House, which passed a similar bill a year earlier, and where there were more than enough co-sponsors to assure passage of last fall’s bill, the Republican leadership said it would not allow it to come to the floor. John Boehner called it “pretty dangerous”.

No bill has found its way to any president’s desk for signing and the current White House would rather it not. Obama is reluctant, not wanting a combative bill to roil the currency markets in an election year, no matter the continued damage to the nation’s economic health.

The International Monetary Fund (IMF) has more spine. Since 2007 it has produced reports showing which countries undervalue their currencies to create jobs at home and unemployment in trading partner countries. But the reports can be published only with the permission of the cuntry in question, and China has always denied the right — until just recently, which some take as indication that it has learned it can get away with currency manipulation. The IMF has said the Chinese renminbi (the name of the currency; the yuan is its basic unit) is "substantially undervalued", which is its descriptor for a currency at least 20% below its fair market value.

China is more than prickly when threatened by accusations of currency manipulation. Its officials counter with outrage at American economic profligacy. A Xinhua News Agency editorial scolds us with the hope that the U.S., as the printer of the international reserve currency, recognizes its responsibility to assure the value of other countries’ dollar holdings. The debt ceiling battle of last summer and our political parties’ willingness to flirt with default was, for People’s Daily, “a warning to China that the United States will ignore the interests of creditors for the sake of domestic political battles”.

a paralysis of fear

America’s inaction year after year fear is twofold: that tariffs would set off a trade war, or the Chinese would cease propping up the U.S. government by refusing to buy our Treasury notes with the dollars it earns from exports — or both. So from all fronts we hear timidity.

A former president effectively says do nothing: threatening China with tariffs won’t solve any problems, says Bill Clinton. “When was the last time you got tough on your banker”? Joseph Nye at Harvard’s Kennedy School says the best way to make an enemy of China is to treat it like one.

And there are those who want us to believe that that the renminbi is undervalued by only a few percentage points because inaction benefits their business interests in China. The head of the U.S.-China Business Council told the International Herald Tribune that if the Senate’s anti-manipulation vote “is a jobs bill, it is a jobs bill for Vietnam”, because as costs rise owing to revaluation of the yuan, companies would simply move their factories to even cheaper countries. Translation: no point in doing anything. The council represents 250 companies doing business in China. They lobby to not rock the boat even if Chinese imports are beggaring the United States.

The Wall Street Journal feared that tariffs — “countervailing duties” — would unleash a wave of protectionism, reminding us that “in 1930, Smoot-Hawley and the retaliation it spurred contributed to a collapse of world trade and deepened the global depression”. Tom Friedman fairly swooned from the vapors, sputtering, “But, Lord in heaven, do not let the House pass this bill. That would trigger a trade war in the middle of our Great Recession. We tried that in 1930. It didn’t end well”. But then was the reverse of now. Then, the U.S. was the world’s China, its leading exporter. Now, curbing imports would hurt China more than their retaliatory tariffs levied again us.

Vice President Joe Biden at least took a sterner tack in his welcoming speech to Xi Jinping, listing the many ways that China cheats, but the Chinese must be amused by such bluster, because the United States takes so little action.

As for the second fear, China knows that if it started a selloff of dollars, it would drive the value of the dollar to new lows, much as happens to any commodity when an oversupply is pushed into the market. Their dollar investment would take a beating and the end result would leave the U.S. with a weak dollar incapable of continued buying of so much Chinese product. China would be hurt two ways.

So how do we get out of this trap?

Why not incremental steps? What would happen if we declared, say, a 5% tariff across the board for all Chinese imports. Actually, we did that in 1971, confronting undervaluation by imposing a temporary 10% percent surcharge on imports. It worked. It was rescinded a few months later when Germany, Japan and other nations raised the dollar value of their currencies. China’s reaction could be more incensed, but is it likely that they would risk their advantageous trade relationship with the U.S. over what would have no greater effect than boosting the heavily undervalued yuan by 5%?

And if that goes well, we could threaten 10% if China does not redress a number of iniquities that we will take up in this series.

As Mitt Romney, the one candidate who wants to face up to China, said in this Washington Post op-ed:

“China is selling us $273 billion per year more than America is selling China — why would it possibly want a trade war? And what is the alternative to confronting China? It is allowing the Chinese to take by trade surrender what we fear to lose in trade war”.
But no one dares take the risk. For certain, the repercussions with China could be greater, but once they saw the U.S. had some backbone, they could as well decide that fighting their best customer tit for tat would be unwise. Too fearful to take that risk plays straight into China’s hands. As Romney said, “Who can blame the Chinese for ignoring our timid complaints when the status quo has served them so well?

The question is: are we ever going to confront the problem? To borrow from (of all people) Grover Norquist, who was speaking of the federal government, it at times seems that by drifting ever onward toward the drain, our “leaders”’ policy for this country is to “shrink it down to the size where we can drown it in the bathtub”.

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