China’s undervalued currency is costing the U.S. economy more than $200 billion per year in lost growth and is reducing American employment by as much as 1 million jobs, two leading international trade economists claim.
Beijing uses currency manipulation to maintain the value of its currency, the yuan, at an artificially low value, which makes its exports much cheaper and its imports more expensive, charged Nobel laureate Paul Krugman and C. Fred Bergsten, director of the Peterson Institute for International Economics.
The currency manipulation keeps the yuan, also known as the renminbi, undervalued by 25 percent on a trade-weighted basis and 40 percent relative to the dollar and provides China with an unfair trade advantage in violation of international trading rules, Mr. Bergsten charged.
China vehemently denies that it is a currency manipulator in violation of trading rules and that it engages in unfair trade practices. Premier Wen Jiabao used a rare press conference Sunday to reiterate China’s denials and warn other countries against pushing Beijing too hard.
“We are opposed to the position of engaging in mutual finger-pointing or taking strong measures to force other countries to adjust exchange rates,” Mr. Wen told reporters in Beijing.
But there was no shortage of finger-pointing Friday in Washington, when Mr. Krugman and Mr. Bergsten spoke at a conference sponsored by the liberal Economic Policy Institute.
Mr. Bergsten described China’s intervention in the currency market as “staggering and unprecedented,” which Mr. Krugman seconded. Mr. Bergsten estimated China is spending $30 billion to $40 billion per month to keep its currency undervalued.
The International Monetary Fund’s rules “are very clear,” Mr. Bergsten insisted. “They say, ‘Thou shall not competitively undervalue.’ With any prolonged, one-way, massive intervention, you are violating the IMF rules of the game,” he explained.
He also noted that the preferred approaches of “sweet reason” and multilateralism have not succeeded in persuading China to change its policies.
“If the United States won’t itself designate China as a manipulator, how can we expect the IMF to do it?” he rhetorically asked.
Mr. Bergsten said the exchange rate problems “totally swamp” all the adverse effects on U.S. employment caused by free trade agreements, such as the North American Free Trade Agreement with Mexico and Canada that Congress ratified in 1993.
Arguing that the United States and other advanced countries face a liquidity trap with short-term interest rates already near zero, Mr. Krugman described a world in which China’s mercantilist policies injure its trading partners.
China’s massive trade-related current account surplus, which peaked at 12 percent of its gross domestic product (GDP) in 2008, does “come at the expense of jobs and employment elsewhere in the world,” charged Mr. Krugman, who received his Nobel Prize in economics in 2008 for his work on international trade theory.
If China stopped manipulating its currency, it would produce a favorable net export shock to the United States, Europe and Japan amounting to about 1.5 percent of GDP, increasing the U.S. economy by about $220 billion, Mr. Krugman estimated.
According to Mr. Bergsten’s calculations, a 25 percent to 40 percent revaluation in the yuan would reduce the U.S. trade deficit between $100 billion and $150 billion per year, adding between 750,000 and 1 million jobs to American payrolls. Robert Scott, a senior economist at EPI, estimated that China’s currency manipulation cost the U.S. economy between 1.5 million and 3 million jobs.
With America having lost nearly 8.5 million private-sector jobs since the recession began in December 2007, all three economists acknowledged that addressing the currency problem with China would only partially offset the America’s biggest jobs slump since the Great Depression. However, Mr. Bergsten also emphasized that this economic improvement would come at “no budget cost” and would be “a lot better than any fiscal stimulus package.”
All three economists at the forum endorsed a policy that would label China a currency manipulator when the Treasury Department submits its next semiannual currency report to Congress on April 15.
Unless China relents and allows its currency to significantly appreciate, Mr. Krugman called for a temporary, across-the-board tariff on all Chinese imports, insisting the chances for a trade war were “very small.”
Noting that India’s prime minister has complained about Chinese mercantilism and Mexico has “screamed” about it, Mr. Bergsten even offered a “guarantee” that most of China’s other trading partners would follow suit if the United States imposed a 25 percent tariff on Chinese goods.