A lot of economists and corporate leaders who are involved in international business have dinged Mitt Romney for his repeated pledge to name China a currency manipulator on his first day in office. The criticism is being blown out of proportion. Romney is not painting himself into nearly as tight a corner as many people think. And the whole issue is very nuanced.
Start with background and some of the nuances.
In the past two decades, China certainly has managed its international financial transactions to keep the yuan lower in value compared with other currencies, particularly the U.S. dollar, than if exchange rates were left to float in response to market forces. If China had not been doing this, it would not have amassed $3.2 trillion in foreign currencies. Of this, an estimated $2.3 trillion is in dollars including about $1.15 trillion held in U.S. Treasury bonds.
Buying up large quantities of dollars has had the intended effect of making Chinese exports less expensive to U.S. buyers than they would have been otherwise. The purchases also make U.S. exports more expensive in China. This skews the balance of trade between the two countries. It makes many things cheaper for U.S. consumers, and helps hold down inflation here, but it hurts profits and employment in any U.S. sector that exports or competes with imports.
That China has done this is not a matter of debate. Liberal Nobel laureate Paul Krugman has noted it repeatedly, as have myriad other economists including some from the highly respected Peterson Institute for International Economics. The idea that a manipulated currency can act as an export subsidy and as an import tariff is standard fare in undergraduate textbooks.
The question is what we should do in response.
In 1988, Congress passed a law requiring the Treasury to make an annual review of our trading partners and identify those who manipulate their currencies in this way. This is the law Romney wants to invoke now.
Many assume, and Romney hints, that naming China a currency manipulator would mandate the automatic imposition of stiff tariffs or other restrictions on imports from China. This is not the case.
All the law requires is that the government “take action to initiate negotiations … for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange.”
We are already doing that. So what would change?
Romney critics argue that — whatever the circumstances — challenging China when our nation, Europe, and China itself are on the brink of recession risks touching off a self-destructive trade war. They also assert that if we did impose tariffs it would break trade pact commitments we have made over decades. (This is correct, but it hasn’t stopped us in the past.)
Moreover, they note that many other countries follow policies that depress the values of their currencies internationally and that the “quantitative easing” policies followed by the Federal Reserve push down the value of the U.S. dollar.
Finally, the critics point out that the first and largest effect of import tariffs would be the same as a high sales tax on items like clothing that make up a big part of spending by many households. Such taxes are regressive, meaning low-income households take the hardest hit.
All this is all true.
If I really thought that Romney would act to immediately impose harsh tariffs, I’d join the critics.
But he clearly is a very flexible man. If he is elected and actually does declare China a currency manipulator on Jan. 21, I bet that he’ll say “and we promptly will enter into negotiations with China as the law requires.”
And it will effectively end there.
Remember that, at various times in their campaigns, President Barack Obama, John McCain, John Kerry, George W. Bush and Al Gore all promised to get tough with China on the currency issue.
If my memory is correct, so did Bill Clinton and Bob Dole. (Also remember Obama’s 2008 pledge of a tough renegotiation of NAFTA). Yes, Romney has made the promise more strongly, more repeatedly, and later in his campaign than other candidates. But don’t assume that means a lot.
I doubt the Chinese worry very much. Despite a spate of buying dollars to depress the value of the yuan in 2008-09, their general policy in recent years has allowed it to gain value. It is now at its highest value relative to the dollar in 19 years. They are not adding to their dollar reserves rapidly, if at all.
Japan has passed them in its holdings of U.S. Treasurys. Even Israel has much larger holdings of dollars relative to gross domestic product and has driven down the value of the shekel more than China ever did with the yuan.
More important, domestic prices and wage rates in China have risen sharply in the past few years.
That has the same effect on relative prices for trade as an increase in the yuan’s exchange value. Some economists estimate that China’s labor costs are now as high as Mexico’s. Manufacturers needing low-skilled workers are bailing out of China for cheaper places like Bangladesh or Vietnam. And the overall deficit in the U.S. trade balance has dropped sharply in the past four years.
Our trade officials, and Romney’s economic advisers, already know this. If not, Chinese negotiators would be quick to point it out.
The issue of Romney’s campaign pledge is a tempest in a teapot.
But, after the election, the broader question of the global economic inefficiencies that occur when many nations manipulate their currencies will remain.
That, however, is the subject of another column.