Henry Paulson: Defender of the
yuan? By Peter Morici
Beijing's currency manipulation imposes
severe economic costs on the United States, Europe
and many developing countries that compete with
China. Persuading China to revalue its currency
should be new US Treasury Secretary Henry
Paulson's top priority. Sadly, Paulson has already
indicated he will continue the failed policies of
his predecessor, John Snow.
In 1995, China
fixed the value of the yuan at 8.28 per US dollar.
In July 2005, it adjusted this peg to 8.11, and
announced that the yuan would be aligned to a
basket of currencies; however, the yuan still
tracks the dollar closely, is currently trading at
about 7.97, and remains at least 40% overvalued.
China's trade surplus with the United
States has grown from $34 billion in 1995 to more
than $200 billion, and its global trade
surplus exceeds $400 billion.
These surpluses create a demand for yuan
that exceeds supply in currency markets, and
should drive up its value to 4 or 5 yuan per
dollar. Instead, Chinese monetary authorities
subvert market forces each year by selling more
than $200 billion in yuan, and stashing in their
vaults the US and other foreign currencies they
accept as payment. Those purchases amount to about
9% of China's gross domestic product (GDP), and
create a 25% subsidy on exports and a tax on
imports.
This situation encourages
factories, especially in durable-goods industries
such as automotive products and more sophisticated
electronics, to move to China, and redeploys US
and European workers into lower-productivity
activities. This lowers US and European Union GDP
and growth.
An undervalued yuan pushes
down prices for Chinese products such as
televisions and furniture, but it causes inflation
in many other sectors of the global economy. Every
time a factory job leaves the United States or EU
for China, global oil consumption and prices go
up, because China uses petroleum to generate
electricity very inefficiently and workers move
from the countryside into the cities.
This
inflation requires the US Federal Reserve and
European Central Bank to raise interest rates. In
essence, these institutions must limit growth in
the West so that China can grow at more than 10%,
and have become unwilling accomplices to Chinese
mercantilism.
Similarly, China's currency
practices steal exports of labor-intensive
products and growth from other developing
countries. China is the bully boy at the cafeteria
line hogging all the pie.
China's
mercantilism is an important reason free trade is
increasingly resisted by voters and politicians
around the globe, and the Doha Round of world
trade negotiations is failing.
Subsidizing
exports and taxing imports is protectionism by any
economist's definition, and resisting Chinese
mercantilism would strike a blow for free trade.
Yet Paulson in his first speech as
treasury secretary on August 1 called for a strong
dollar, and cautioned, "I am very concerned about
the anti-trade rhetoric I hear coming from some
quarters."
Scolding businesses and workers
victimized by Chinese protectionism is not going
to get China to revalue the yuan. Nor will
lecturing China, as he did in interviews, that
revaluing the yuan "would be a huge benefit for
China because China right now has an economy that
appears to be overheating".
China may be
growing at more than 10% a year, but Chinese
inflation is less than 2%. With inflation so low,
China is not going to listen to Paulson's
prescriptions. He urgently needs new tools to
persuade China to revalue the yuan significantly,
but President George W Bush will not give those to
him.
For example, the Bush administration
opposes a bipartisan bill sponsored by Congressmen
Duncan Hunter and Tim Ryan that would add the
subsidies provided by currency manipulation to the
list of protectionist trade practices actionable
under US trade law. It would permit domestic
manufacturers to petition the Commerce Department
and US International Trade Commission for duties
on Chinese imports to offset these subsidies.
This law would be consistent with World
Trade Organization rules that prohibit export
subsidies. It would not be protectionism; rather,
it would permit measures to offset Chinese
subsidies and protectionism.
Bush's
reluctance to respond to China's currency
manipulation encourages large US multinationals
such as Caterpillar, General Electric and General
Motors to move production there. Similarly, large
retailers such as Wal-Mart, Target and Staples pad
their profits with subsidized Chinese imports.
Profiting from Chinese protectionism,
these companies systematically oppose strong
action by Washington to combat it. They have
become Beijing's most effective lobbyist in
Washington.
Paulson, a former investment
banker, seems quite comfortable with these
arrangements.
Peter Morici is a
professor at the University of Maryland school of
business and former chief economist at the US
International Trade Commission.
