In 2010, over 350 members of the House agreed to a bill designed to punish China for their currency manipulation. In 2011, 68 members of the Senate agreed to a similar bill. But in a year-end report to Congress, the Treasury Department voiced their disagreement, refusing to label China a currency manipulator, instead opting for softer language around their failing to “reform” currency operations.
Some U.S. politicians have argued that China has gained an unfair competitive edge in global markets by keeping the yuan artificially low to boost exports, and pressure has mounted in Congress for President Barack Obama to punish China.
But the administration prefers to tread softly and use diplomacy to effect change. The U.S. Treasury, in a semi-annual report, as usual said that statutes covering a designation of currency manipulator “have not been met with respect to China.”
It repeated its standard line that appreciation in the yuan has been too slow, calling it “insufficient.”
“Treasury will closely monitor the pace of appreciation and press for policy changes that yield greater exchange rate flexibility, a level playing field, and a sustained shift to domestic demand-led growth,” it said in the report to Congress on international economic and exchange rate policies.
There are real consequences to this unsuccessful diplomatic effort. The economy loses millions of jobs by allowing an undervalued yuan relative to the dollar. Prices for our exports wind up higher than they should be. Chinese manufacturers gain a competitive advantage.
The frustrating part of this is that the Treasury clearly states in the report (available here that China’s currency appreciation has been “insufficient.” The report highlights an IMF study that showed the yuan to be undervalued by as much as 23%. It adds that the real effective exchange rate has not really budged since 2001, with China only making up the difference of its depreciation from 2001-2005 in the ensuing six years. But political factors have clouded following through on the implications of that. Labeling China a currency manipulator would bring sanctions on Chinese imports.
Scott Paul of the Alliance for American Manufacturing had this reaction:
China’s currency is still enormously undervalued—that fact is clear despite the Treasury report. I’m disappointed that President Obama has now formally refused to cite China six times for its currency manipulation, a practice which has contributed to the loss of hundreds of thousands of American manufacturing jobs.
The ball is now is Speaker Boehner’s court, since the President has failed to show leadership in this area. The House of Representatives should pass currency legislation as soon as it returns in January.
The Senate’s majority was actually veto-proof, and if Speaker Boehner allowed the bill to come up on the floor, that would probably also be the case in the House. The public wants fair trade solutions, not perpetuating a trade imbalance because of diplomatic niceties. As for the claim that such a move would start a trade war, I seem to remember China slapping a duty on US auto imports. If there’s a war, the other side is firing all the shots.
I recognize that the Treasury believes that China will eventually have to rebalance their currency to increase household consumption and domestic demand-led growth. They spotlighted a number of quotes from Chinese leadership to that effect. This is a good statement of their views:
While rebalancing the Chinese economy away from production of exports to provision of domestically consumed goods and services may create challenges in the short run for manufacturers that rely excessively on external demand, it is important to recognize that the longer the currency remains undervalued, the greater will be the misallocation of resources that will eventually have to be corrected.
But this has been a familiar refrain, and while everyone waits, Chinese manufacturers grab an ever-increasing share of the market. Real jobs are at stake with this delay. And Treasury simply refuses to use the means at its disposal.