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China is back in the forefront of US policy concerns. Here are a number of articles to consider on whether or not China is a currency manipulator, and if so what to do about it.
Geithner Sidesteps Congress
Geithner Delays Currency Report, Urges Flexible Yuan
U.S. Treasury Secretary Timothy F. Geithner delayed a scheduled April 15 report to Congress on exchange-rate policies, sidestepping a decision on whether to accuse China of manipulating the value of the yuan.China’s Premier Says Trade Imbalance Not Fault of Any One Country
Geithner in a statement urged China to move toward a more flexible currency and said a series of meetings over the next three months will be “critical” to bringing about policy changes that lead to a stronger and “more balanced” global economy. The delay comes as Chinese President Hu Jintao is scheduled to visit Washington for a nuclear summit April 12-13.
The Treasury chief has faced demands from Congress to label China a currency manipulator for keeping the value of the yuan little changed from about 6.83 to the dollar for almost two years. Geithner is instead betting that China will take steps on its own in the next several months to strengthen its currency, analysts said.
“We are disappointed, but not surprised, by the administration’s decision,” Senator Charles E. Schumer, a New York Democrat, said in an e-mailed statement. “After five years of stonewalling, punctuated by occasional, but halting action by the Chinese, we have lost faith in bilateral negotiations on this issue.”
Schumer, along with four other senators including South Carolina Republican Lindsey Graham, last month introduced legislation to require the Treasury to determine if a nation had a currency misaligned with the dollar and make it easier to respond by imposing import duties.
Today’s delay “underscores the urgent need” for Congress to pass such legislation, said Alan Tonelson, research fellow with the U.S. Business and Industry Council, a Washington-based organization representing about 2,000 manufacturing companies.
“There can be no question that attempts to negotiate an end to China’s currency manipulation have failed for eight years and it is long past time for unilateral U.S. responses,” Tonelson said.
“The past few years have proven that denying the problem doesn’t solve anything,” Senator Charles Grassley of Iowa, the top Republican on the Senate Finance Committee, said in an e- mailed statement. “The Treasury Department should cite China as a currency manipulator.”
Wen Says Lopsided Trade Not Fault of Any One Country
China’s Premier Wen Jiabao said one country can’t be blamed for imbalances in trade relationships, a comment that comes amid pressure on the Asian nation to allow its currency to appreciate.Geithner Confident China Will Move to Strengthen Yuan
Trade problems “can’t be blamed on one side,” visiting Japanese Finance Minister Naoto Kan quoted Wen as saying today.
“I didn’t tell him what to do” about China’s currency, Kan told reporters today in Beijing after the meeting. “I told him I expect China to make a wise judgment.”
Repeating treasury statements going back to Paulson and before that to Snow, Geithner Says He’s Confident China Will Move to Strengthen Yuan
Treasury Secretary Timothy F. Geithner expressed confidence China will decide that a stronger currency is in the country’s interest, saying the U.S. is trying to “maximize the chance that they move quickly” on the yuan.China Trade and American Jobs
“Our strategy is going to be designed to increase the odds that China does decide to do what’s in their interest, which is to let their currency start to move up again, and that’ll be part of making sure we have a more healthy global recovery in place,” Geithner said in New York.
Hu’s decision to visit Washington this month increases the likelihood his nation will escape being branded a currency manipulator by the U.S., strategists said. Ties between the two countries may be mending after a year marked by disagreements over the yuan’s value, U.S. arms sales to Taiwan and Google Inc.’s decision to pull out of China.
“It is probably true that Washington and Beijing have an agreement: the U.S. will not label China a currency manipulator and China will make some sort of yuan policy change at or before the end of the bilateral Strategic and Economic Dialogue in late May,” said Derek Scissors, a Washington-based research fellow for Asia economic policy at the Heritage Foundation.
Inquiring minds are reading the Wall Street Journal article China Trade and American Jobs
Although the Chinese currency appears to be undervalued, the evidence suggests that appreciation will not reduce the bilateral trade deficit. Between July 2005 and July 2008 the renminbi rose 21% against the dollar, to $.1464 from $.1208, where it had been pegged since 1997. But the trade deficit, according to the trade statistics compiled by the U.S. Census Bureau, nevertheless increased to $268 billion from $202 billion over that period.Krugman’s Chinese renminbi fallacy
Textbooks say that the Chinese should increase purchases of American products when the renminbi's value increases against the dollar—and indeed they did by $28.4 billion. But exports to China were already increasing rapidly before the currency began to appreciate, rising by $19 billion between 2002 and 2005, according to the Census Bureau.
Textbooks also predict that Americans will reduce their purchases of Chinese products in response to an appreciating renminbi. But U.S. imports from China between 2005 and 2008 actually increased by a whopping $94.3 billion, or 39%.
Sen. Charles Schumer (D., N.Y.) and others on Capitol Hill attribute 2.4 million American job losses between 2001 and 2008 to the bilateral trade deficit. This figure comes from the union-backed Economic Policy Institute. EPI's methodology is not taken seriously by most economists because it approximates job gains from export value and job losses from import value, as though there were a straight line correlation between the figures. And it pretends that imports do not create or support U.S. jobs.
But U.S. producers—purchasing raw materials, components and capital equipment—account for more than half of the value of U.S. imports annually, according to the U.S. Bureau of Economic Analysis. Those imports support U.S. jobs in a wide range of industries.
Furthermore, according to the results from a growing field of research, only a fraction of the value of U.S. imports from China represents the cost of Chinese labor, materials and overhead. Most of the value of those imports comes from components and raw materials produced in other countries, including the U.S.
In a 2006 paper, Stanford University economist Lawrence Lau found that Chinese value-added accounted for about 37% of the total value of U.S. imports from China. In 2008, using a different methodology, U.S. International Trade Commission economist Robert Koopman, along with economists Zhi Wang and Shang-jin Wei, found the figure to be closer to 50%. In other words, despite all the hand-wringing about the value of imports from China, one-half to nearly two thirds of that value is not even Chinese. Instead, it reflects the efforts of workers and capital in other countries, including the U.S. In overstating Chinese value by 100% to 200%, the official U.S. import statistics are a poor proxy for job loss.
According to a widely cited 2007 study by Greg Linden, Kenneth L. Kraemer and Jason Dedrick of the University of California, Irvine, each Apple iPod costs $150 to produce. But only about $4 of that cost is Chinese value-added. Most of the value comes from components made in other countries, including the U.S. Yet when those iPods are imported from China, where they are snapped together, the full $150 is counted as an import from China, adding to the trade deficit and inflating EPI's job-loss figures.
Rounding out this set of articles on China please consider Krugman’s Chinese renminbi fallacy.
In 2010, Krugman suddenly found a new and passionate interest in China’s exchange rate policy. On 1 January, in his piece “Chinese New Year”, Krugman claimed that America had lost 1.4 million jobs because of the undervalued renminbi and, therefore, he endorsed trade protectionism against China. On 11 March, in another piece, “China’s Swan Song”, he advised the Treasury Department to name China as a currency manipulator. And on 12 March, at an Economic Policy Institute event, in Washington, he said that global economic growth would be about 1.5 percentage points higher if China stopped restraining the value of its currency and running a trade surplus.I expressed some thoughts on China and balance of trade issues on March 22 in China Not As Simple As Krugman Thinks; The Coming Trade War With China
Let’s imagine some scenarios in which Krugman gets what he asks for. The US Treasury Department names China as a currency manipulator and the Obama administration launches a trade war against China. If this were to happen, the most likely scenario is that China would then stick to its current exchange rate regime and retaliate with trade sanctions against America. This would reduce trade between the two countries and, more importantly, seriously damage investor confidence worldwide. A trade war between the two largest economies is a non-trivial event for the world economy. In face of a much more uncertain economic future, investors would scale back their investment plans and consumers would cut back their spending.
A less likely scenario is that China would be forced to appreciate the currency sharply by, say, 40 %. This is likely to cause significant difficulties for Chinese companies. Again, there could be two possible outcomes. The first is that Chinese companies would no longer be able to export because of sudden loss of competitiveness. The market vacuum newly made available by the exit of Chinese products would be taken up by products from other low-cost countries like Vietnam and India. American companies would not be able to compete with these countries. So this would not add new jobs in the US, but the inflation rate would move higher.
Since exports account for more than one-third of the Chinese economy, a collapse of exports would cause serious difficulties for China. Chinese growth would decelerate sharply, as happened in late 2008. This would be unfortunate since most major economies are still struggling with recovery. And sudden weakening of the world’s most dynamic economy would send chilling messages across the world markets. Investor confidence would again fall sharply.
The second possible outcome is that China would continue to export to the US market, at higher prices but lower profits. This would push up inflation rates significantly in the US and force the Fed to tighten monetary policy quickly. Both steps could hurt the momentum of America’s recovery, which is still not yet on steady footing. New difficulties in the US and China, the two largest economies of the world, would impact global investor confidence negatively.
As I said in the above link, things are not as simple as Krugman thinks. I will have still more thoughts late Sunday or Monday on what needs to be done and why.
Mike "Mish" Shedlock
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