Congressional fulminations (and possibly genuine anger) about China’s policy of currency manipulation are mounting steadily, and hearings set for mid-September could produce retaliatory legislation. That’s why the two following arguments will start popping up quickly all over official Washington and the media.
First, as the Obama administration already has insisted, Beijing will soon voluntarily recognize the folly of undervaluing the yuan and giving Chinese-made products major artificial price advantages in markets everywhere. Yes, manipulation has persisted for eight years despite loud complaints from domestic producers being undersold unjustly, but Americans still will be urged to give China just a little more time.
Second, as many bandwagon-hopping economists are claiming, pressure on China is needed, but multilateral pressure will work better than unilateral American sanctions. Many of China’s trade partners, they maintain, finally are hopping mad, too.
Too bad for both groups of ditherers that the always dubious cases for these arguments are collapsing more spectacularly than Charlie Rangel’s congressional support.
The China voluntary-ists like to tout China’s 20 percent yuan revaluation from 2005 to 2008 and its June promise to allow more yuan movement within its current system of controls. But the 2005 move was just 20 percent in nominal terms, and because China’s finances became so much stronger afterward, the real degree of undervaluation actually rose dramatically during that time. The June announcement, meanwhile, clearly was a head fake. Since then, Beijing has permitted the currency to appreciate by all of 0.38 percent through Monday.
More important, China’s economic prospects face three important threats. China itself is trying to cool off growth in order to prevent dangerous inflation. Slowdowns in the U.S. and other foreign markets are endangering China’s gargantuan export sales — the key to keeping Chinese unemployment under control and the regime in power. And finally, growing worker unrest is helping boost wages in China’s coastal export-production centers.
This last trend, however, is easily misunderstood. Chinese wages remain so low that significant catch-up even with other Third World countries (and competitors for export-oriented investment) is nowhere in sight. So don’t expect growing Chinese affluence per se to reduce the PRC’s bloated trade surpluses for decades, at best. China also still has plenty of surplus — and therefore even cheaper — labor in the interior, where some production already is moving.
Nonetheless, the last thing Beijing wants to do is simply shift joblessness among regions. Therefore, keeping the yuan unnaturally cheap to help control overall Chinese production costs is likelier to become more, not less, important to Beijing going forward.
Legitimate hopes for ending currency manipulation multilaterally have just been dashed, too. Most have centered on the International Monetary Fund, which is charged with handling exchange-rate issues and whose bylaws prohibit countries from manipulating currency values to gain trade advantages. The organization is also a convenient proxy for international opinion — especially regarding what governments really believe, as opposed to their rhetoric.
Before the global credit bubble burst and triggered the Great Recession, the fund was responding to critics and speaking out more forcefully about the yuan’s undervaluation and its effects on global economic stability. But the IMF no longer has anything even approximating teeth in this area. Further, it has so far refused to condemn Beijing’s exchange-rate protectionism — in one instance, resisting pressure from the George W. Bush administration to label Beijing a manipulator.
Last month, the fund actually softened its China currency position. In their latest annual assessment of Chinese economic policy, the fund’s directors explicitly rejected their staff’s longtime description of the yuan as “substantially” undervalued. The board removed the S-word and even credited China with taking domestic measures to encourage consumption at home. In so doing, the board suggested pointedly that major currency moves were not essential for reorienting China’s economy away from export-led growth and thereby reducing a major distortion of the global economy.
With the “voluntary-ist” and multilateralist arguments so obviously in tatters, President Obama and the Democratic-controlled Congress are out of excuses for continued China currency inaction. Every day they delay responding to a brazenly predatory practice that keeps destroying American businesses and jobs will reinforce the politically explosive impression that they’re stalling not for tactical reasons, but to curry favor with outsourcing multinational corporations — whose China production benefits handsomely from currency manipulation, too.
• Alan Tonelson is a research fellow at the U.S. Business and Industry Council, a national business organization whose nearly 2,000 members are mainly small- and medium-sized domestic manufacturers. Author of “The Race to the Bottom,” Mr. Tonelson also is a contributor to the council’s website: www.AmericanEconomicAlert.org