- The Washington Times - Wednesday, September 24, 2003

On the just completed trip of Treasury Secretary Snow to China, the focus was not upon human rights, North Korea, or any of the topics that have become the core of U.S.-China relations. Rather the discussion was on China’s currency — the reminimbi or Yuan — and its peg or government set exchange rate with the U.S. dollar. This may sound like the dry minutiae only of interest to bankers and Treasury officials, but the peg is an important reason for the more than $100 billion annual Chinese trade surplus, with the attendant tens of thousands of lost U.S. jobs — many in the high-paying manufacturing sector. Fortunately, this is a problem -the United States can begin solving, provided the Bush administration has the political will to play hardball with Beijing. To understand the issue of the Chinese exchange rate, it is important to first look at U.S.-China trade. Over the last decade, the U.S. trade deficit with China has exploded — growing from about $20 billion in 1992 to a whopping $100 billion in 2002 — a fivefold increase. It is no surprise then that China has replaced Japan as the leading source of the U.S. trade deficit. To put these numbers in context, the Commerce Department and others have used a rule of thumb that every $1 billion improvement in the U.S. trade deficit created more than 10,000 new U.S. jobs. Using that standard, the trade deficit with China could explain the loss of well more than 1 million U.S. jobs. In the latest economic downturn, the U.S. has lost more than 2 million manufacturing jobs. Admittedly, the relationship is complex, with a number of factors to be considered, but — since the overwhelming majority of U.S.-China trade is in the manufacturing sector — it is certain the loss of many of those manufacturing jobs is linked to the trade imbalance with China. Of course, by itself a trade deficit — particularly with just one country — must be interpreted with caution. Global trade figures are more relevant. China has a trade surplus with the world, but a relatively modest one of around $20 billion, especially in comparison to the mammoth surplus with the United States. China, however, has grown strongly in recent years while most of the world — the United States, Europe, and Japan — have battled recession. Under these conditions, one would expect the fast-growing economy to outstrip domestic production and begin drawing in imports probably resulting in a trade deficit. Far from falling into a trade deficit, however, China has expanded its trade surplus with the world in recent years. How has China managed to swim against the economic tide? Again, there are many factors, including domestic consumption and trade barriers, but unquestionably one central factor has been China’s insistence on retaining an exchange rate vs. the dollar and other major currencies that is fixed and does not respond to changing economic conditions. Other major currencies are traded on a global market, which means their relative value is constantly shifting in response to economic conditions, including trade flows. Conventional economic wisdom holds that a trade surplus would lead to a stronger (more valuable) currency compared to other currencies. This, in turn, would make imports less expensive and exports more expensive and, thus, move the trade account back toward balance. Thus, by stubbornly holding its exchange rate in place, however, China is insulated from this adjustment and effectively imposes a tariff on all imports and subsidy on all exports. This is why a coalition of U.S. businesses has joined Japan’s leaders and others around the world in arguing that China’s currency may be undervalued by as much as 40 percent and demanding action to put things right. Belatedly, responding to these concerns, the Bush administration began criticizing China’s currency peg. Not surprisingly, Beijing turned a completely deaf ear to these complaints. China has long pursued a policy aimed at building a trade surplus. Allowing its currency to appreciate will force China to adjust as its trade balance shrinks; it is not a step Beijing will take without pressure. Failing to press for change, however, would mean allowing China’s pegged currency to continue to distort trade with the world and impose a burden of unemployment on its trading partners, most notably the United States. The polite criticism of Treasury Secretary Snow is a start. But much more dramatic action is called for from the United States. The U.S. should seek to organize all of China’s major trading partners to press Beijing to allow the market, not government bureaucrats, to set its exchange rates. Action through the International Monetary Fund and the World Trade Organization (WTO) should be considered. And, if all that fails, the United States should consider restricting China’s exports to the United States — a measure allowed under the terms on which China joined the WTO a few years ago — until China trades fairly. Of course, all these steps may have a cost, but so does tolerating an enormous trade deficit and the tens of thousands of lost jobs that go with it.

Greg Mastel is chief international trade adviser at Miller & Chevalier, Chartered, and a fellow at the New America Foundation. Previously, he was chief economist at the U.S. Senate Finance Committee.

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