Centerfield: Visit by Chinese Pres. Hu spurs currency debate...again. What's the answer?

April 20, 2006

Visit by Chinese Pres. Hu spurs currency debate...again. What's the answer?

First of all, I think President Hu's visit is important. Our countries need dialogue on many key issues....with trade being of the main and furthest reaching areas of debate. But I remain a bit cynical. While I'd like to see Bush make some progress with Hu, I know China will not be as cooperative as some in the West would like.

In a nutshell, many American pols, economists and trade experts think the Yuan is seriously undervalued. How so? Basic economics tells us that when a country has a severe trade imbalance with another, the currency values will fluctuate to correct the deficit. Specifically, when a country like China has a huge trade surplus with the U.S., the yuan should increase in value and the dollar decrease. This will, in basic theory, make chinese imports more expensive and american imports (to China) cheaper. The markets adjust and life goes on. But China's currency policy is such that the Yuan is pegged to the dollar so they move together at a fixed exchange. The Yuan is a not a free-floating currency like the dollar, euro or pound. So, the currencies don't revalue and help correct the deficit. That's the gist of it.

China's central bank, trying to offer a token compromise, introduced a limited "managed float" of the Yuan last July. Since then, it has gained more than 3% against the dollar.

But US critics say it is still valued around 40% too low, and want the Yuan to be freely floated on international currency markets.

from ABC News:

Bush, sitting in the Oval Office with Hu before a formal luncheon, praised China for previous progress in what is perhaps the major irritant in the relationship Beijing's tightly controlled currency.

The United States views the Chinese yuan as undervalued, and Bush said, "We would hope there would be more appreciation" in allowing the currency to rise with market forces.

One remedy put forth by and supported by the more populist and protectionist wings of both parties is a 27.5% protective tariff on Chinese imports to get them to loosen up and "play fair". Many however are skeptical about its ability to help level the field against China. Prudent or not, it's an easy sell on Main St. for pols. I'm not so sure it's a bad or good idea. I can't really tell. Making many "WalMart products" more pricey may make Americans angry since they've learned to think first as consumers and second as workers.

In an issue of the Economist earlier this month, the writer claims these currency debates are largely overblown and wrong-headed. Ofcourse one must keep the magazine's free-trade, almost libertarian, view in mind when reading.

The article claims that the deficit with China accounts for only 1/3 of the total US trade deficit over the past five years...making focus on China unfair. It also states that since joining the WTO, China has become an attractive place for manufacturing....which used to be done in other places like Taiwan and S.Korea. As result, America's gap with the rest of Asia has closed and been offset by rising deficits with China. It also states that China runs a deficit with other Asian nations and its exports to the U.S. are what give China its total trade surplus (not sure this one makes total sense since europe and S.America are not considered). It also claims since China accounts for only 10% of trade with America, currency adjustment will only yield minimal results.

None of this matters, according to the Economist. No. To them the problem is internal and Ameica needs to look in the mirror: "..the real cause of that deficit is that the country consumes too much and saves to little.". Also, protectionist measures would not bring back jobs...though it may slow down the outsourcing. But they may make other less expensive countries more attractive...but still more expensive than China. This may, however, encourage China to finally do things to boost domestic consumption in the form of better workers' rights and higher wages.

The article goes further and claims the current arrangement with China has actually helped America because cheap imports hold down inflation and interest rates. China's gobbling of Treasury Bonds has also kept money cheap and fueled the housing boom. If China started shedding these Bonds, the bond yields would go up and slow down other economic sectors.

Ofcourse, China is not blameless or innocent. And I agree with the Economist in its claim that China needs to do a better job at respecting intellectual property rights and improve access of American firms in China to do unfettered business in China. This will boost Chinese consumption of American products. China's middle-class market for such goods is arguably bigger than most large western european countries. In closing however, the Economist points first to America to get its fiscal house in order and start saving some cash: "America would be in a much stronger position to lecture China over its currency if its own economic policies were in good order"

Ofcourse, I'm also starting to hear certain circles claim that boosting national savings is an antiquated goal. Not sure I see why or agree. I agree that Americans consuming less and saving more would massively shrink the trade deficit but may also shrink other growth-senitive areas as well. Never an easy answer. But getting China to boost domestic consumption seems the best idea to me. I think, in our gloablly integrated economy, that protectionist measures have negative reprecussions. Global integration means less obstruction....but it must have rules that encourage equality. If not, it's just fancy policy for sweat shops and a race to the bottom in terms price and profit margin.

Posted by John at April 20, 2006 05:31 PM

Comments

Darn. I was actually looking forward to hearing what people thought on this topic.

Posted by: Bobby at April 21, 2006 02:42 PM

Me too, since I spent so much time starting the thread.

Wonky issues that go into policy nuance seem to leave people with to say apparently. Maybe I should have laced the post with some red meat and partisan opinion.

The problem, for me at least, is that once I leave behind the broad generalizations of ideology and moral code and delve into data-driven case study, particularly and mainly on economic and fiscal policy, I lose all sense of ideological or partisan bias and tone.

Posted by: John at April 21, 2006 03:03 PM

I haven't yet commented because it was just way too long on the front page, John. You needed to have most of it in the expanded entry box.

Posted by: PatHMV at April 21, 2006 04:15 PM

Although I am treading lightly here, I suspect that China is being unfairly attacked for its currency policy. I also think it was wrong to prevent their purchase of an American oil company. For once, I would agree with Russian commentators that a "Trojan horse" policy might work to bring China more into the Western fold.

On the other hand, China’s military build up with little global responsibility to enforce international law, its lack of enforcement of intellectual property rights, and most importantly its political oppression, torture and poor environmental and worker standards cannot be ignored. Iran, NK, oppression of political dissent and thinking of oil and resources in helping regimes like Sudan's must be firmly resisted. There are probably more spies from China here than anywhere else and most are involved in corporate spying. Giving them the fruits of billions of US taxpayer dollars is dangerous to our continued leadership and security.

I believe there was a Chinese commitment to keeping growth down below 7% to curb energy use and pollution. There are also international agreements of proliferation and arms control that China has a bit of contempt for. Their current row with Taiwan and Japan is setting up the region for some tough discord.

As far as China fueling our borrowing spree with easy money, China needs to put their money somewhere and we seem to need the trade and loans. At some point (now?) this arrangement is damaging to both parties because of the political reaction it might produce here.

What to do about this all? I don't really know except that China fears any economic slowdown. If you read Epoch, extremists in the Chinese military are some very scary people. Somehow, the West must link global trade and commerce to improving China's behavior and move her closer to the ranks of those who sincerely see the importance of continued Western hegemony.

Maybe this is as difficult as the Dodgers winning the World Series this year, Heh Bobby?

Posted by: maxtrue at April 21, 2006 07:30 PM

I haven't commented because I need to think about how much and whether such stuff truly matters. I wonder whether the market does find other ways to just flow around the "blocking" of pegged currency. So I'm very reluctant to jump to worrying aboiut nightmare tinfoil hat scenarios where the Chinese are conspiring to permanently and inexorably grab us by the economic short and curlies.

I was watching a comedian last night, and told this joke where he said he felt that by law we should all have the right to hold a dentists nuts in our hand while he works on us. Economics has a way of working like that. Suppose China does suddenly think they are ready to squeeze us hard. Just as they do so, will they feel a gentle touch in their private quarters?

The problem with thinking you have someone right where you want them becuase they owe you money is that if you want to get paid back, this limits your options.

China is going to do largely as it wants, and we should be pretty much used to that. Other nations can say the same about us. Yet in relations where both sides have an interest, it's not really true that one side can always do just as it wants. The onlky thing that's really ever true in such instances is that every actor can ALWAYS fo just as he or she wants, so long as he or she is willing to accept the consequences. Power only does so much to isolate the powerful from consequences.

Posted by: bk at April 22, 2006 03:02 PM

The conundrum for me is somewhat along the lines of what bk started with, and I'm focusing very specifically on the currency valuation going on in China. I have a very hard time seeing how such artificial manipulation can have a real long-term effect, at least not the desired effect. And I'm not saying it can't, I just have a very hard time seeing it. I really need to get more formal training in economics, cause this kind of crap drives nuts.

Posted by: WHQ at April 23, 2006 12:32 AM

Maybe this is as difficult as the Dodgers winning the World Series this year, Heh Bobby?

Just you wait, Max! As I write, the Dodgers have gone up 4-1 on the mighty Arizona Diamondbacks! With Nomar Garciaparra finally back from the Disabled List (although, curiously, he sat out today's game), and Eric Gagne's surgery pronounced a "success" (although, that's what they said last year when he missed the entire season and still needed a corrective surgery this spring), the Dodgers are rolling!!!

All we need is the Giants and Padres to implode, and we should get the NL West straight-up. And once we get into the playoffs, a few "emergencies" for th elikes of Albert Pujols, Jim Edmonds, and Mark Mulder, and the St. Louis Cardinals won't be so tough!!!

Posted by: Bobby at April 23, 2006 05:26 PM

IMO the Dodgers have as good a shot at the NL west as anyone else. But honestly. I don't see any NL teams otgher than the Cardinals and Mets as serious contenders. The Astros are always scrappy. I wonder if the Cubs have the pop to stay round while Lee is out. The Phillies lack ptiching, the Braves seem to miss Mazzone and maybe time is finally up for them.

The AL, OTOH, is packed with solid teams. The White Sox are the best all round, and Indians, Red Sox, and Blue Jays are all good well-balanced teams from starters to hitting to bullpen. The Angels are very good, though I doubt their pop. The Yankees have without a doubt the best batting order in all of baseball, maybe even ever, but I think their lack of really top notch starting pitching will get them in the end. The A's have enough ptiching to be there too. And I even think that the Orioles and Tigers would have a shot in the NL west.

Posted by: bk at April 23, 2006 08:36 PM

Centerfield

A Weblog of Centrist Voices in American Politics

April 20, 2006

Visit by Chinese Pres. Hu spurs currency debate...again. What's the answer?