I thought it might be interesting to gather up the various views that have been expressed on the China currency issue. I have two key questions in mind:
1) Is the Chinese currency peg at an (allegedly) undervalued rate bad for the U.S. economy/global economy?
2) If it is bad, what is the appropriate response?
Here's a brief rundown of some views expressed by prominent bloggers/op-ed writers/others on each point, in no particular order.
Is the Chinese currency peg bad for the U.S. economy / the global economy?
Don Boudreaux says it's good for the U.S. and bad for China:
A low-priced yuan certainly shifts business to some Chinese producers and away from American producers who compete with them, just as genuine efficiency improvements in Chinese industry take some business away from American producers who compete with Chinese producers. But contrary to protectionists’ claims, Beijing’s efforts to lower the price of the yuan harms the Chinese economy and benefits the economies (including that of the United States) whose people trade with the Chinese.
Scott Lincicome thinks a change in the policy would be bad for U.S. manufacturing:
the results of the currency protectionists' demands - a weaker dollar and a stronger RMB - would actually harm US manufacturing trade as global investment flees the United States for more stable fiscal ground. Thus, not only would the RMB's appreciation not shrink the US-China trade deficit, but it also would cripple America's once-unmatched ability to attract domestic and foreign capital. This is an awful double-whammy, and a critical flaw in the protectionists' arguments for direct US action on China's currency.
Gary Becker thinks it's an overall plus for the U.S. economy:
I am dubious about the wisdom of both America's complaints about China's currency policy and of China's responses. On the whole, I believe that most Americans benefit rather than are hurt by China's long standing policy of keeping the renminbi at an artificially low exchange value. For that policy makes the various goods imported from China, such as clothing, furniture, and small electronic devices, much cheaper than they would be if China allowed its currency to appreciate substantially in value. The main beneficiaries of this policy are the poor and lower middle class Americans and those elsewhere who buy Chinese made goods at remarkably cheap prices in stores like Wal-Mart's that cater to families who are cost conscious.
To be sure, US companies that would like to export more to China are hurt by the maintenance of the Chinese currency at an artificially low value relative to the dollar. As a result, employment by these companies is lower than it would be, so that this may contribute a little to the high rate of US unemployment. But I believe the benefits to American consumers far outweigh any loses in jobs, particularly as the US economy continues its recovery, and unemployment rates come back to more normal levels.
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So my conclusion is that the US in its own interest should not be urging China to appreciate its currency- countries like India have a much greater potential gain from such an appreciation. On the other hand, I see very little sense at this stage of China's development in maintaining a very low value of its currency, and accumulating large quantities of reserves.
Paul Krugman thinks it's bad for the global economy:
Tensions are rising over Chinese economic policy, and rightly so: China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done.
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And it’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.
Dan Drezner (via email, no link) thinks it's a serious problem:
Post-Great Recession, China's manipulation of the yuan is really bad. I'm completely with Krugman/Bergsten that there's a serious problem.
Martin Wolf thinks it's bad for the global economy:
the policy of keeping the exchange rate down is equivalent to an export subsidy and tariff, at a uniform rate – in other words, to protectionism. Third, having accumulated $2,273bn in foreign currency reserves by September, China has kept its exchange rate down, to a degree unmatched in world economic history. Finally, China has, as a result, distorted its own economy and that of the rest of the world.
Economist Robert Aliber says it hurts U.S. jobs:
Americans have been patient – too patient – in accepting the loss of several million US manufacturing jobs because of China’s determined pursuit of mindless mercantilist policies.
Arvind Subramanian says it's protectionism (and is thus bad):
undervalued exchange rates are de facto protectionist trade policies because they are a combination of export subsidies and import tariffs.
And he says it's particularly bad for the developing world:
China’s exchange rate policy is really mercantilist trade policy. It has a currency policy that makes imports very difficult to come into China and it has a policy that subsidizes exports. That’s what the exchange rate policy does. Now, if it does that, who are the victims of that? Those countries that compete with China in trade terms. And who are those countries? Other emerging market and developing countries and not the United States and the European Union.
If it is bad, what is the appropriate response?
Some want to impose a tariff on Chinese imports:
Economist Robert Aliber:
The US can help China make the necessary adjustments toward a reduction in imbalances by adopting a uniform tariff of 10 per cent on all Chinese imports, based on their values when they enter the US. Six months after the establishment of this tariff, the rate would increase by one percentage point a month until the Chinese trade surplus with the US declines to $5bn a month.
In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.
Some want countervailing duties applied to Chinese imports in the amount of the undervaluation:
we urge the Department of Commerce to apply the U.S. countervailing duty law in defense of American companies who have suffered as a result of the currency manipulation. The U.S. is permitted to respond to subsidized imports where the elements of a subsidy are met under the countervailing duty law. The countervailing duty law outlines a three-part test to identify the presence of a countervailable subsidy: 1) that it involves a financial contribution from the government; 2) that it confers a benefit; and 3) that is specific to an industry or a group of industries. China’s exchange rate misalignment meets all three parts of this test and therefore merits the WTO-permitted application of countervailing duties.
Some want the Department of Treasury to declare China a currency manipulator:
So what are we going to do?
U.S. officials have been extremely cautious about confronting the China problem, to such an extent that last week the Treasury Department, while expressing “concerns,” certified in a required report to Congress that China is not — repeat not — manipulating its currency. They’re kidding, right?
we ask the Department of Treasury to include China in its bi-annual agency report on currency manipulation. Since 1994 Treasury has not identified China as a country that manipulates its currency under the terms of the Omnibus Trade and Competitiveness Act of 1988 (“Trade Act of 1988”), but Secretary’s Geithner testimony to the Senate acknowledging that fact surely justifies the inclusion of China in the report. After labeling the country as a currency manipulator, Treasury should enter into negotiations with China regarding its foreign exchange regime. These combined actions will signal the government’s willingness to take decisive action against China’s currency manipulation, including the potential filing of a formal complaint with the World Trade Organization.
Some want IMF surveillance or a WTO complaint:
Any serious US effort to curb the United States' international imbalance will thus have to counter the beggar-thy-neighbor policies of other countries. The most desirable route would be multilateral surveillance and "name and shame" efforts by the IMF to identify currency misalignments and induce the perpetrators to make prompt adjustments. However, the IMF has no effective leverage over creditor countries; in fact, it has recently abandoned any serious effort to bring China's and other countries' currency imbalances under control. An alternative would be to enforce the provisions of the World Trade Organization that prohibit competitive currency action and authorize trade sanctions against violators
Some want a new WTO agreement (working with the IMF) on exchange rate undervaluation:
What is needed is a new rule in the WTO proscribing undervalued exchange rates. The irony is that export subsidies and import tariffs are individually disciplined in the WTO but their lethal combination in “an undervalued exchange rate” is not.
Some want to get the WTO involved in some undefined way:
But the mainstream consensus is starting to shift toward the idea that the World Trade Organization (W.T.O.), not the I.M.F., should have jurisdiction over exchange rates. The W.T.O. has much more legitimacy, primarily because smaller and poorer countries can bring and win cases against the United States and Western Europe in that forum. It also has agreed upon and proven tools for dealing with violations of acceptable trade practices; tailored trade sanctions are permitted.
Some want to focus less on trade, and also prefer the multilateral to the unilateral:
Dan Drezner (via email, no link):
I prefer a multilateral or club-based response, and I'd prefer intervening on the capital account side rather than on the trade side. There might be a moment down the road when the unilateral option is necessary, but I don't think we're there yet.
Some want the U.S. to set its own peg:
the US doesn't have to "pressure" China to boost the yuan. Contrary to what you may have read in the paper, Washington is not helpless in this story.
Just as China can set a value of its currency against the dollar, the US government can set a value of the dollar against the yuan. The Chinese government currently supports an exchange rate at which the dollar can buy 6.8 yuan. This high value of the dollar makes US goods uncompetitive relative to China's. To make US goods more competitive, the US could adopt a policy through which it will sell dollars at a much lower price, say 4.5 yuan.
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Have I missed anything? Feel free to add it to the comments.
Personally, I think an intentionally undervalued currency can be a form of protectionism. I'm not qualified to determine whether a particular currency peg qualifies as "intentionally undervalued," but a lot of smart economists and others seem to think that is what is going on here. Of course, there are always winners and losers from any particular trade policy. I agree that some U.S. consumers are better off with the current situation. But on balance, I think it would better for the world economy if production decisions were based on market forces.
As to the response, the proposal for a new agreement related to currency undervaluation is my preferred option. But I recognize that will be difficult to achieve. In terms of specific action by the U.S. (and others), it seems to me that a WTO complaint is the least confrontational, in the sense that it would mean submitting the issue to a neutral arbitrator. But the effectiveness of such a strategy is uncertain.
