Breaching China's Great Currency Wall

“It’s time to take a stand,” economics Nobel laureate and New York Times commentator Paul Krugman advises this week .  “Something must be done.”

No, Krugman is not talking about health care reform this time.  He is calling for action against a threat to global economic recovery as dire as the creative schemes for financial destruction he regularly rails against Wall Street for hatching. 

This threat, he says, is hatched from abroad:  the Chinese government’s policy of keeping its currency, the renminbi, immovably pegged to the dollar—and grossly undervalued.  And Krugman is not alone.

Even the most dedicated free-trade economists are alarmed.  Columbia University economist Jagdish Bhagwati calls for “people’s feet being held to the fire” by an International Monetary Fund empowered to deal with willful currency misalignment, according to a Times dispatch  from Hong Kong reporting on Beijing’s skillful use of “inconsistencies in international trade rules to spur its own economy at the expense of others.”

John Williamson and William Cline of the Peterson Institute for International Economics warn that “China has again begun to ride the dollar down,” using an artificially low exchange rate for the renminbi to gain a huge price advantage for Chinese goods in international markets—effectively a price discount on their goods, they calculate, of up to 40 percent.   

One consequence is the rebound in the Chinese economy after the 2008 economic meltdown stabilized last year—it expanded an astonishing 8.7 percent, and manufacturing employment has surged--while American job levels have stagnated.  True, China’s own domestic stimulus spending deserves much of the credit; China’s exports have contracted with the collapse of Western consumption spending--but not nearly as much as U.S. manufacturing.   

The massive economic imbalances between China and the United States that result, Williamson and Cline insist, “pose systemic threats” to the global economy.  The director of their institute, Fred Bergsten, describes  Chinese economic planners’ unshakable determination to keep the renminbi cheap as “an off-budget export and job subsidy” and laments the “devastating impact on the global trading system” from the continuing “currency misalignments.” 

Chinese officials have been quick to cry “protectionism” whenever their currency-contrived conquest of American industries triggers demands for remedial measures in Washington.  Their bark frightened off Bush administration officials already predisposed to unfettered free trade.  But that dog may not hunt as readily in Obama’s Washington, where far less threatening trade measures are drawing skeptical scrutiny now that labor unions have a seat at the trade table.

The administration, rightly, does not want to undermine the architecture of the painstakingly constructed international trading system, where impartial multilateral panels adjudicate charges of unfair trade practices.  But it can and should find a way to support initiatives that roll back currency misalignments that fuel unsustainable imbalances.  The I.M.F. scrupulously and impartially collects the relevant economic data; those data provide the basis for compensatory measures.

In a rare example of bipartisan initiative in our filibuster-snarled Senate, two Democratic senators, Max Baucus and Charles Schumer, and two Republican colleagues, Lindsey Graham and Charles Grassley, have been pressing legislation to correct currencies that are in “fundamental misalignment.”   As Krugman suggests, a carefully calculated currency correction (he estimates, in the China case, 25 percent) -- imposed as a surcharge based on I.M.F. data on products from countries incapable of rectifying their currency imbalances -- can help fix the problem.

Chinese officials may be tempted to contest such an initiative in a World Trade Organization tribunal rather than respond constructively to the invitation to correct the currency misalignment.  The United States can strengthen its case before international public opinion if it dedicates any revenues realized from a currency surcharge not to its own industries or its government budget, but to development projects of the World Bank or United Nations agencies.

In a mano-a-mano test of wills with China’s economic policymakers (who may be counting on stealth allies in American business that have invested heavily in outsourcing production to China), gestures like the use of currency surcharge revenues can make a difference.  After all, this is not simply a Chinese-American wrangle. Many other countries have a stake. 

The Europeans and countries throughout the developing world are deeply concerned about China’s manufacturing steamroller, powered by its currency discount—just as they are by Chinese obduracy in rejecting any limits on climate-change emissions.  China’s leaders risk unifying the international community against them in the economic arena as thoroughly as high-handed American conduct in the political sphere once isolated the United States.  The Obama administration should not let this opportunity slip.

Comments

[Elwin Sykes]

Imagine the USA matching China's policy that every car used in China be built in China!

[Mike McSweeney]

” One consequence is the rebound in the Chinese economy after the 2008 economic meltdown stabilized last year—it expanded an astonishing 8.7 percent, and manufacturing employment has surged--while American job levels have stagnated. "

We didn't see this happen at all. In fact, in both southern and northern china we saw dramatic numbers of Chinese factories close their doors and make thousands of workers redundant.

I do agree though, that the RMB is skewed.