As reported in this linked article, Timothy Geithner, Obama’s Treasury Secretary nominee, when questioned about currency manipulation by China, described it as a “significant issue” and as “… an important issue for the country …”
I’ve really got my antennae up, alert for any clues as to whether or not Obama will really take meaningful action to restore a balance of trade. This is just one, small, early indication that he’s willing to take it on. Yes, I’m making a bit of a leap from Chinese currency manipulation to our overall trade deficit, but why else would Obama be concerned about this issue? Does he merely want American consumers to pay more for imports from China? It doesn’t seem logical that that’s all he’s after. A strengthening yuan would indeed drive up the cost of Chinese imports, but what he’s really after is a restoration of the profit potential to motivate a return to manufacturing products domestically, driving up the demand for labor which, in turn, would drive up incomes, more than off-setting any rise in prices.
Of course, if we wait for currency valuation to improve the trade deficit, we’ll be waiting forever, just as we have for the last three decades. The dollar may fall against the yuan, but the Chinese will simply compensate in some other way – perhaps by increasing the government’s subsidies of Chinese manufacturers – in order to hold prices down. So the real question is how quickly Obama will run out of patience. When he does, it’s going to be fun to watch what happens!