An undervalued yuan offers Beijing great advantages but imposes significant
costs on the US economy. That is not likely to change any time soon, because
those costs are not apparent to many Americans feasting on cheap imports, and
President George W Bush and Congress lack the courage to act effectively.
In a nutshell, Beijing prints yuan and buys US dollars in currency markets to
keep down the dollar exchange rate for the yuan. This
makes Chinese goods cheap in US stores and US goods expensive in China.
With the dollars obtained, Beijing purchases US securities, which keeps US
interest rates down and recycles dollars into the hands of US consumers to buy
cheap Chinese manufactures.
As Federal Reserve chairman Ben Bernanke observes, this creates a subsidy on
Chinese exports, which by my math comes to at least 25%. It also imposes a
hidden tax on US products sold in China.
China supplements currency shenanigans with tax rebates on exports and complex
restrictions on imports and foreign investment, which in effect require General
Motors, Intel and others to produce in China to sell there.
China exports not merely goods making abundant use of inexpensive labor, but
also technology-intensive products, where China has few natural advantages.
That's how China runs up a US$230 billion annual trade surplus with the United
States.
The Chinese economy grows about 10% a year. This permits the Communist Party to
keep an increasingly sophisticated population focused on rising living
standards and distracted from corruption, hazardous environmental conditions,
and the absence of democratic reforms, which would remove party officials and
their families from opportunities to amass great wealth.
Other Asian governments follow variants of China's currency policies, and
together their purchases of US debt help Americans to consume 5-6% more than
they produce and enjoy low prices at Wal-Mart. Those Americans not competing
directly with Asian imports feel richer and are disinclined to support strong
action against China to effect change.
Multinational companies such as Caterpillar may earn less manufacturing in the
United States, but they are doing very well in China. As their investments in
China grow, they have a deepening stake in Chinese protectionism, and outwardly
resist US measures that could impel China to alter its policies.
However, China's policies are driving out of business many US manufacturers
that would be competitive but for subsidized competition from China and
elsewhere. Thanks to currency manipulation, 2 million US manufacturing jobs
have been lost, and US gross domestic product is about $250 billion lower than
it would otherwise be. Also, potential GDP growth is a full percentage point
lower than the 4% a year it could be. The resulting costs far exceed any
benefits Americans receive from cheap coffee tables and television sets at
Wal-Mart.
The essential political problem in the United States is that immediate and
visible costs imposed by Chinese mercantilism are most concentrated on perhaps
less than 25% of the population, while the benefits, though smaller in total,
are broadly available to most voters.
In Congress, many members want to appear to be doing something about the
problem, to appease constituents directly harmed by China's policies, but won't
support measures that strike at the heart of Chinese mercantilism. In
particular, the Democratic majorities in the Senate and House of
Representatives have refused to embrace legislation that would require the
Department of Commerce to apply non-protectionist countervailing duties on
imports, which would merely offset the currency subsidies Ben Bernanke has
identified, when those imports injure US businesses and result in job losses.
The White House outwardly opposes any such policy, and promises that diplomacy
will yield positive results after years of failure. It has obtained changes in
International Monetary Fund rules to require that institution to investigate
Chinese currency practices further. Not to be outdone, House Ways and Means
Committee chairman Charles Rangel has asked the US International Trade
Commission to investigate the trade deficit with China.
The time for study and diplomacy has long passed. Bush needs to recognize
China's subsidies for what they are. He has the authority, without any new
legislation, to empower and require the Commerce Department to apply
countervailing duties to Chinese currency subsidies when they harm US
industries. That could be done in ways that fully comply with World Trade
Organization obligations.
Bush should explain to the American people why that is the right thing to do it
and then do it. If he doesn't, Congress should compel it.
Until the Americans move, China won't revalue.
Peter Morici is a professor at the University of Maryland School of
Business and former chief economist at the US International Trade Commission.
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