by Joseph E. Gagnon, Peterson Institute for International Economics
Op-ed in U.S. News & World Report. Reposted with permission.
October 13, 2011
© U.S. News & World Report
Any exchange rate involves two currencies by definition. Congress, and the US government more broadly, undeniably have an interest in any foreign attempt to manipulate the value of the dollar in terms of another currency. So, what action should the US government take in response to China's currency policy?
First, it is important to understand what China is doing. The currencies of countries that are growing rapidly tend to increase in value, which offsets their declining costs of production and maintains balanced trade. By aggressively buying US and European assets, China short-circuits this currency appreciation in order to boost Chinese exports and damp Chinese imports. This is a strategy that has been copied by many other developing economies, and the International Monetary Fund estimates that governments in these economies are spending about $1.2 trillion this year to hold their currencies down, about half of which is accounted for by China. This spending has distorted trade balances between developing economies and advanced economies by a roughly equal amount, so that US net exports are at least $400 billion lower than they would otherwise be. That translates into 3 million or more lost jobs in the United States.
Before the Great Recession, the US Federal Reserve responded to this currency manipulation by holding interest rates low to relieve pressure on the dollar and to encourage job creation in the United States. Much of the job creation came in the form of building houses. Now that the housing bubble has collapsed, the Fed has pushed interest rates to zero and yet the recovery remains woefully weak. We need China to stop its harmful manipulation immediately.
The best course of action would be to tax the assets that China and other currency manipulators buy in the United States, as I proposed recently with my colleague Gary Hufbauer. This has the advantage of being consistent with international law and it gets directly at the cause of the problem. The current legislation being considered by Congress imposes minor rule changes for antidumping and countervailing duty cases, changes to US government procurement practices, and consultations with international institutions. These will not have a serious impact on China or other currency manipulators and some of these measures may be ruled illegal under international law.
Op-ed: Taxing China's Assets: How to Increase US Employment Without Launching a Trade War April 25, 2011
Working Paper 12-19: The Renminbi Bloc Is Here: Asia Down, Rest of the World to Go? October 2012
Policy Brief 12-7: Projecting China's Current Account Surplus April 2012
Book: Sustaining China's Economic Growth after the Global Financial Crisis January 2012
Book: Eclipse: Living in the Shadow of China's Economic Dominance September 2011
Op-ed: Why the World Needs Three Global Currencies February 15, 2011
Policy Brief 10-26: Currency Wars? November 2010
Op-ed: Obama Has to Tell Beijing Some Hard Truths November 29, 2010
Congressional Testimony: Correcting the Chinese Exchange Rate September 15, 2010
Policy Brief 10-20: Renminbi Undervaluation, China’s Surplus, and the US Trade Deficit August 2010
Op-ed: Chinomics: Yes, China Does Need that Infrastructure June 23, 2010
Policy Brief 10-16: Deepening China-Taiwan Relations through the Economic Cooperation Framework Agreement June 2010
Congressional Testimony: China's Exchange Rate Policy and Trade Imbalances April 22, 2010
Op-ed: New Imbalances Will Threaten Global Recovery June 10, 2010
Policy Brief 10-7: The Sustainability of China's Recovery from the Global Recession March 2010
Congressional Testimony: Correcting the Chinese Exchange Rate: An Action Plan March 24, 2010
Paper: Submission to the USTR in Support of a Trans-Pacific Partnership Agreement January 25, 2010
Peterson Perspective: A Growing US-China Rift January 6, 2010
Book: China's Rise: Challenges and Opportunities (hardcover) September 2008
Paper: China Energy: A Guide for the Perplexed May 2007
Speech: Is China a Currency “Manipulator”? January 28, 2009
Congressional Testimony: China's Role in the Origins of and Response to the Global Recession February 17, 2009
Book: US-China Trade Disputes: Rising Tide, Rising Stakes August 2006
Book: Debating China's Exchange Rate Policy April 2008
Congressional Testimony: A Muscular Multilateralism to Engage China on Trade September 21, 2011
Peterson Perspective: Legislation to Sanction China: Will It Work? October 7, 2011
Book: The Future of China's Exchange Rate Policy July 2009
Working Paper 11-14: Renminbi Rules: The Conditional Imminence of the Reserve Currency Transition September 2011