April 05, 2010

By Zhiqun Zhu

A group of U.S. senators recently unveiled a bill aimed at pressuring China to appreciate its currency, the renminbi. The senators claim that China has kept the renminbi undervalued against the dollar, hurting the U.S. economy and costing American jobs.

The proposed bill also is aimed at pressing the Obama administration to formally label China a "currency manipulator" and threaten stiff trade sanctions if Beijing does not act.

The bill, which may sound sensible, is in fact misleading and represents efforts by some politicians to blame other countries for America's own economic problems.

Economists have yet to establish a direct link between the renminbi's exchange rate and the conditions of the U.S. economy.

Value of currency
While many including Morgan Stanley Asia chairman Stephen Roach and Goldman Sachs chief economist Jim O'Neill concur with Chinese Premier Wen Jiabao's assessment that the renminbi is not undervalued, some, such as Nobel economics laureate Paul Krugman, suggest that it is time to take action to compel China to raise the value of its currency.

Most people outside the United States point to America's domestic problems, such as poor financial regulations and low savings, as major culprits of the current financial crisis.

Those who propose tough actions against China dismiss genuine concerns that it is American consumers who will suffer if a trade war breaks out. They ignore the fact that a sudden appreciation of the renminbi is likely to create economic and political instability in China, which in turn will lead to economic disruptions across Asia.

A sudden surge in the value of the renminbi would also shrink China's $2.4 trillion foreign exchange reserve overnight - a scenario China will undoubtedly do its best to avoid. ¶

Combative comment
Sen. Chuck Schumer (D-NY)'s combative comment that "we are to tell them [the Chinese] we are going to force you to do it [appreciate the renminbi] — plain and simple" is counterproductive, particularly when China has indicated that it will adjust the renminbi at its own pace and based on its own domestic conditions.

During the 1997-98 Asian financial crisis, China was widely praised for maintaining stability of the renminbi and thus helping other Asian nations to weather the financial storm.

China's current efforts to keep its currency stable are also helping the international community to recover from the worst economic recession in decades. China has been a leader in stimulating domestic demand and global growth during this crisis, according to a policy briefing released by the UN Conference on Trade and Development.

The large trade imbalance between the U.S. and China is primarily due to the changing global trade structure. While the U.S. trade deficit with China has widened over the years, its trade deficit with other economies has grown slowly or even declined.

'Made in China'
The reason is simple: Many Japanese, Korean, Singaporean, Hong Kong and Taiwanese companies have moved their production to the Chinese mainland. The products we purchase at Wal-Mart are "Made in China" but not "Made by China." A large chunk of the gains from Chinese exports is retained by these foreign (including American) companies.

Some politicians and economists single out the renminbi as being solely responsible for the trade imbalance between the U.S. and China, but they have not informed Americans properly that the United States maintains an export ban on high-tech products to China.

Many of these export restrictions, which are illegal under WTO rules, were originally applied in the aftermath of the 1989 Tiananmen Square incident. The Chinese want to purchase more, but the United States has these self-imposed trade barriers for fear of damaging its national security. The question is: How can one expect the trade deficit to be reduced if we only sell apples and oranges to China?

The United States and several other Western countries played the currency card on Japan in the mid-1980s, which led to a "lost decade" of Japan's growth in the 1990s and essentially ended Japan's impressive economic miracle.

After being lured into signing the so-called "Plaza Accord" in 1985, Japan was forced to appreciate the yen. This imposed currency revaluation was at least partially responsible for the burst of Japan's economic bubble and stagnation that followed. One wonders why we want to play the currency card on China now.

Blaming the renminbi's exchange rate for the growing U.S. unemployment is simply irresponsible. Shifting attention — and responsibility — to others for America's economic woes will only hurt America.

It is high time that members of Congress and President Obama focused on generating more jobs and stimulating domestic growth.

Posted April 5, 2010


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