Don't Buy The Multinationals' Bogus Argument About Yuan Exchange Rate
When it comes to getting tough with the Chinese, the reflex of American multinationals is to deflect pressure from the Middle Kingdom, where the trade surplus rose to its second-highest level this year. Alas, the arguments are often bogus, as in the case of the Chinese exchange rate.
With hearings in Congress next week on China's exchange rate, Treasury Secretary Tim Geithner will be on the hot seat to explain why the Obama administration isn't doing more to fight China's blantantly manipulative exchange rate policy. Back in June, the Chinese tweaked their policy on the yuan in order to dodge a showdown at the G-20 meeting in Canada a few days later, but then walked back much of what they proclaimed. Small wonder the toughies in Congress like Rep. Sander Levin, the new Democratic chairman of the House Ways & Means Committee, and Sen. Chuck Schumer, who would like to whack the Chinese with trade sanctions, are keeping up the pressure.
The WSJ checked up on the China currency debate, and included, without rebuttal, an old saw of the business lobbyists from Erin Ennis, vice president of the U.S.-China Business Council. Ennis, the Journal writes
doesn't believe the legislation will achieve either of the two primary goals of the legislation: cutting the U.S. trade deficit and boosting manufacturing. She points out that the Chinese allowed their currency to appreciate over 20% between 2005-2008, and yet the trade deficit increased, and U.S. manufacturing employment has trended down for several decades. "There are some things that can be done to shore up U.S. manufacturing, but we just don't think this is what does it," Ennis said.Zing! Thank you for playing. This line has been debunked any number of times, but I'll outsource it to Fred Bergsten, president of the Peterson Institute for International Economics, who has, to his immense credit, taken a tougher and tougher line in this debate. Bergsten, in congressional testimony earlier this year, parsed the numbers on the yuan, aka the renminbi, and concedes that the Chinese allowed an appreciation from 2005 to 2008. But, he points out:
During that time, the maximum increase in its trade-weighted and dollar values was 20 to 25 percent (which represented good progress although it still left an undervaluation of roughly a like amount at that time). It has since depreciated again significantly, riding the dollar down, so that its net rise over the past five years is only about 15 percent. Moreover, despite China's declared adoption of a "market-oriented" exchange rate policy in 2005, its intervention to block any further strengthening of the renminbi against the dollar is about twice as great today ($30 billion to $40 billion per month) as it was then ($15 billion to $20 billion per month); on that metric, China's currency policy is now about half as market-oriented as it was prior to adoption of the "new policy."Put another way, saying the Chinese let their currency appreciate then misses the point that when the dollar fell, the Chinese didn't stay where they were, but took advantage of that fall. Small wonder they are shelling out extra cash to keep their currency where they want it.
Since we last visited the China currency debate, things have only gotten worse. The global recovery resembles a return to the bad habits of big imbalances, with the difference that there's barely any U.S. growth in the picture. Exports could be long-term bright spot, but not if the Chinese stay where they are.
Ignore what the multinationals have to say. Get tough. Nothing else has worked so far.
Image from LostBob Photos via Flickr
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