We hope Treasury Secretary Tim Geithner and Secretary of State Hillary Clinton will be able to set such rhetoric aside next week when they head to Beijing for a fourth round of talks on strategic and economic cooperation.
Make no mistake: China’s exchange-rate policy represents a threat to the world’s financial and economic stability. By keeping its currency cheap to support export-driven growth, China is doing more than just putting the squeeze on other countries’ manufacturers. With dollars piling up from its trade surplus, China is flooding the rest of the world with easy money. That encourages more borrowing and spending, contributing to debt crises like the one from which the global economy is still struggling to recover.
Pushing China to revalue its currency, though, is no way to fix the problem. Economic reality is applying ample pressure without any help from the U.S. China’s share of world exports is reaching the point where further expansion will be unprofitable. The country’s overheated export machine is driving up prices and wages inside China. This real appreciation has the same effect as nudging up the exchange value of the yuan: Chinese goods become more expensive, and hence less competitive, abroad.
Slowly Rising Yuan
China has also been letting the nominal exchange rate slowly rise. As of Wednesday, a yuan bought 15.9 cents, up from 14.6 cents two years ago and 12.1 cents in 2005.
What, then, might U.S. politicians achieve by taking a tough stand on the currency? For one, such pressure could actually prevent Chinese officials from pursuing exchange-rate liberalization, for fear of looking as if they’re capitulating to foreign interests. Worse, if the U.S. -- as Romney has advocated -- follows through on threats to declare China a currency manipulator and imposes sanctions, it could trigger a trade war that would incur heavy losses for both sides.
Even if China moved further on the yuan, it’s not clear the outcome would be beneficial. China faces the daunting task of shifting its economy to consumer-led growth, a move that will require it to end various subsidies supporting export industries. If it gets the timing and mix of currency, trade and financial liberalization wrong, that could derail an economy that has been a major driver of global growth. Such reforms could also lead to social upheaval if major job losses result.
More important, success in reducing China’s trade surplus wouldn’t necessarily help the U.S. In 2011, China’s current- account surplus, a broad measure of trade and financial flows, shrank by nearly 50 percent as a share of gross domestic product -- a trend economists attribute to rising commodity prices, slowing global growth and a previous increase in the exchange rate of the yuan. During the same period, the U.S. current- account deficit hardly budged.
Given the uncertain benefits and abundant risks, the U.S. would be better off doing nothing than adding its voice to that of the growing ranks of China-bashers. If it wants to address the root causes of global trade and finance imbalances, the U.S. could focus on limiting the government’s appetite for borrowing to cover its budget deficits, or on reforming a tax system that encourages consumers and companies to take on debt.
On the Chinese side, officials are aware there’s much to do beyond nudging up the exchange rate. China’s consumers, for example, would have more spending money if they didn’t have to keep their savings in banks that pay penuriously low interest rates. China also would free its consumers to save less and spend more if it created retirement and health-care safety nets.
True, such reforms are more difficult to pursue and sell to constituents than a public fight with a foreign power that is seen as stealing U.S. jobs (the populist American perspective) or looking to contain its ambitions (the nationalist Chinese view). But they would make a more desirable and lasting difference.
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