This is no time to get all worked up over China’s currency manipulation. To use it as an excuse to resist the Obama administration’s pro-trade posture is perverse. This opposition weakens America’s competitive position. All of Asia – the fastest growing part of the world economy – is watching the debate over the Trans-Pacific Partnership. If Congress derails Obama’s trade policies, these countries will rightly conclude that the United States is not a dependable partner. By default, they would be swept into a trading system dominated by China.
To be clear: China’s currency manipulation has been real and harmful to U.S.-based firms and workers. By a variety of estimates, Chinese exports have probably cost two million or more American jobs since 2000. I have been a critic of the currency manipulation in the past and still am. In an ideal world, we would have moved energetically to eliminate it. But (surprise!) we do not live in an ideal world and, for many reasons, it’s less important now than it once was.
For starters, recall that trade-induced job losses are not (and never have been) America’s main employment problem. Domestic developments dominate the U.S. labor market, for good and ill. The American economy now supports about 150 million jobs; 2 million is a small share of that. But of course, if imports eliminated your job, it’s devastating.
Next, China is slowly retreating from export-led growth. To live by exports is to die by exports. You depend too much on the economic health of major customers. The Chinese have always known this abstractly. But after the 2008-09 financial crisis, they experienced it firsthand. Their U.S. and European export markets weakened dramatically. There’s also political vulnerability. At some point, importing countries may find massive inflows of foreign goods intolerable. They embrace protectionist policies, even if illegal under the World Trade Organization. Japan learned this lesson in the 1970s and ’80s.
What’s also clear is that, however undervalued China’s yuan once was, it’s less so today. Since 2005, China has allowed the yuan to rise gradually against the dollar, whether to placate the United States or to disengage from export-led growth. From 2005 to mid-2013, the yuan appreciated 34 percent against the dollar in nominal terms and 42 percent after adjustment for inflation, according to a report from the Congressional Research Service. A stronger yuan makes Chinese exports more expensive on world markets. These increases remain, because the yuan’s exchange rate hasn’t moved much since 2013.
Coincidentally, China’s huge trade surpluses have declined, as have U.S. trade deficits. China’s current account surplus peaked in 2008 at $421 billion and was half of that in 2014 at $210 billion; the U.S. current account deficit shrunk by nearly half, from $801 billion in 2006 to $411 billion in 2014. All this suggests that the invisible subsidies conveyed by China’s currency undervaluation have diminished or perhaps vanished. (The current account is a broad measure of international commerce. Aside from exports and imports, it includes – among other things – revenues from tourism, royalties and remittances.)
The remedy for this uncertain ill could be worse than the disease. A proposal by Sen. Charles Schumer, D-N.Y., would allow companies or industries alleging currency manipulation to petition the Commerce Department for an investigation. A finding of undervaluation would require that penalties be imposed. Almost any industry facing Chinese competition could file a complaint. And not just China: Any country (read Japan, Mexico, South Korea) would be vulnerable.
Last week, the Senate passed the Schumer plan 78-20. If enacted, this would be a bonanza for trade lawyers. But it could be a disaster for trade. It would probably sabotage all the administration’s trade agreements. There’s also a danger of collateral damage. By creating new risks and potential costs for trade and trade-related investment, it could dampen both. That’s the last thing a fragile global economy needs. Other currency proposals are similarly defective. The analogy that springs to mind is Smoot-Hawley: the infamous 1930 U.S. tariff that worsened the Great Depression.
As I’ve argued before, Americans’ confusion about trade relates to the dollar’s role as the main international currency. We assume that U.S. trade deficits prove that we are victimized by other countries’ “unfair” practices. It’s more complicated. Dollars traded on currency markets respond to supply and demand. Demand for dollars to pay for imports or global investment tends to raise the dollar’s price: its exchange rate. A higher dollar then makes U.S. exports more expensive and U.S. imports cheaper. The “overvalued” dollar and resulting trade deficits reflect this process as well as manipulation. The deficits have been continuous since 1976 – well before China’s entry into world markets.
A strong dollar benefits the global economy and punishes U.S. manufacturers. From this nasty dilemma, there’s no easy exit.
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