The above-linked USAToday article reports on the Obama administration’s decision to delay labeling China a “currency manipulator” which, under World Trade Organization rules, would leave the U.S. free to impose tariffs on Chinese imports.
China has nothing to fear from the Obama administration. Its trade surplus with the U.S. is secure and likely to grow. Obama has, time and again, in spite of his campaign promises to enforce trade deals and bring manufacturing jobs back home, proven himself unwilling to take action on trade policy. He still has done nothing in response to large and wide-ranging tariffs raised by Mexico early in his administration. He has never uttered a peep of protest about blatant dumping by Japanese automakers. And, while his administration has done some timid peeping about Chinese currency manipulation, he has once again proven unwilling to act.
Besides, even on the outside chance that he did slap the “currency manipulator” label on China, it would lead to nothing but years of more talk. And even on the outside chance that China did agree to let its currency float and be determined by market forces, it would have no impact on the balance of trade.
Still, Geithner said in a statement that China should adopt “a more market-oriented exchange rate” to balance the U.S. trade deficit with China, which totaled $226.8 billion last year — the largest imbalance with any country. U.S. manufacturers say China’s yuan is undervalued by as much as 40% and is a big reason for the massive trade deficit.
Wrong. Currency valuations have nothing to do with this trade deficit with China nor with any trade deficit. Trade imbalances are driven by imbalances in labor capacity. Excess labor capacity in densely populated nations is driven by their low per capita consumption, eroded by overcrowding. Thus, it is ultimately a disparity in population density that drives global trade imbalances.
If “currency manipulation” is the cause of the U.S. trade deficit with China, then how does one explain an even larger U.S. trade deficit (in per capita terms) with the Euro zone, a region almost as densely populated as China? How does one explain the far larger trade deficit with Japan (in per capita terms), a nation ten times as densely populated as the U.S.? And how does one explain the fact that, in spite of the dollar falling by over 300% vs. the yen in the past four decades, our trade deficit with Japan, instead of falling, actually exploded? The reason is because currency valuations, if allowed to be determined by market forces, actually stabilize at a level where unemployment is evenly distributed, and not at a level where trade is balanced.
A stronger yuan versus the dollar would make U.S. products less expensive in China, while making Chinese goods more expensive for American consumers.
Sure, but that doesn’t mean it will have any effect on trade. China will maintain their market share by taking less profit and by finding other ways to subsidize their manufacturers, just as Japan and Europe have done for decades.
The administration is hoping that China will again allow its currency to rise in value against the dollar as a way of narrowing the trade gap — as it did until mid-2008 when the global recession began to cut sharply into China’s exports abroad.
And what was the result of China allowing the yuan to appreciate by 20% during that time frame? The U.S. trade deficit with China worsened.
The article goes on to present the pros and cons of tough trade action on China, weighing help for American workers against Chinese cooperation on the Iran nuclear issue, and so on. It’s clear that there will always be a reason for the U.S. to be the world’s doormat when it comes to trade policy. American jobs are always the first concession made for international cooperation on one thing or another.
No, China has nothing to fear.