A Reuters article yesterday perfectly distills the problem I see with the current debate on the China currency issue. In previewing the Treasury Department's October 15 Semi-Annual Report to Congress on International Economic and Exchange Rate Policies, Reuters provides the protectionists' standard lines on China's currency, the trade deficit, American manufacturing and their dangerous "solutions":
During last year's campaign, Obama criticized then-President George W. Bush for repeatedly failing to label Beijing a currency manipulator, but then made the same decision in his first stab at the issue in April....
The decision disappointed labor and manufacturing groups, who believe China deliberately undervalues its currency by 20 to 40 percent to give its companies a big price advantage in international trade.
Obama made up some lost ground with labor by recently slapping a 35-percent duty on tires made in China after a U.S. trade panel said a market-disrupting surge had occurred.
But "the magnitude of our trade imbalance with China is so enormous that we can not address it with piecemeal measures, one sector at a time. We have to address the basic pricing problem, which is a currency problem," said Thea Lee, policy director for the AFL-CIO labor federation....
Meanwhile, the Fair Currency Coalition, which includes labor, steel, farm, manufacturing and textile organizations, is looking beyond Obama's decision to action in Congress.Reuters then tees up the free traders' standard response, this time from China expert Nicholas Lardy:
Charlie Blum, the coalition's executive director, said the group is pressing lawmakers to support legislation in the House of Representatives and Senate that would define currency manipulation as an illegal subsidy under U.S. trade rules.
If it becomes law, that would allow U.S. companies to ask the Commerce Department to impose duties offsetting the price advantage China gets from its exchange rate, Blum said.
"There's no question" that China's currency is still undervalued, but a number of positive developments make it unlikely Obama will cite them for manipulation, Lardy from the Peterson Institute said.And so the dance goes, round and round. But while Lardy's statements are certainly correct, neither he (at least not in print) nor Reuters ever questions the protectionists' basic, and critical, premise that forcibly appreciating the RMB against the dollar would somehow be a panacea for US manufacturers. I noted Sunday that there was reasonably strong evidence that such currency appreciation would have little effect on the US-China trade deficit. And in today's Wall Street Journal, economist and former Treasury official David Malpass explains that devaluing the dollar (or appreciating the RMB) in order to make America "more competitive" actually has had, and would continue to have, the exact opposite effect (emphasis mine):
"Not only is their trade balance coming down, but they have had very strong consumption growth ... On some of these big things, they're doing what we want them to do. All the trends are in the right direction," Lardy said.
Some weak-dollar advocates believe that American workers will eventually get cheap enough in foreign-currency terms to win manufacturing jobs back. In practice, however, capital outflows overwhelm the trade flows, causing more job losses than cheap real wages create. This was the lesson of the British malaise, the Carter malaise, the Mexican malaise of the 1990s, Yeltsin's Russian malaise through 1999 and the rest. No countries have devalued their way into prosperity, while many—Hong Kong, China, Australia today—have used stable money to invite capital and jobs.In other words, 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.
The more the dollar devalued against the yen in the 1970s and '80s, the more Japan gained share in valued-added manufacturing, using the capital from weak-currency countries to increase productivity. China is doing the same now. It watches in chagrin as the U.S. pleads with it to strengthen the yuan, adding productivity fast with the dollars rushing its way in search of currency stability.
And it's obviously something that more free traders should be discussing in the days surrounding the Treasury report's release.