Currency Wars

President Obama was in Seoul Thursday to meet with other G20 leaders on the global economic recovery.  The meetings were overshadowed by disagreements between the U.S. and China over trade imbalances and currency devaluation.  Currently, the U.S. is running a $44 billion trade deficit, while China is running a $27 billion trade surplus.  The U.S. and other G20 leaders are encouraging China to allow its currency to rise in value in an effort to increase competition in the export market and ease the imbalance.  An increase in the value of the yuan would make Chinese exports more expensive, which would discourage U.S. consumers from purchasing them.  In the same way, a decrease in the value of the U.S. dollar would make U.S. exports cheaper and more attractive to consumers in China, which would help make the trade imbalance smaller.  Thus far, China has been unwilling to allow its currency to rise in value, which many claim has hampered global economic recovery.  What do you think?  Should China have to allow its currency value to rise in order to encourage economic growth in America?  Is the Chinese economy so tied to the American economy that it would actually hurt China not to do so?

Source: Conor Dougherty & Tom Barkley, U.S. Trade Deficit Narrows, Wall Street Journal, Nov. 11, 2010.

4 comments

  1. Succinct explanation of complicated situation. Was G20 meeting a demonstration of waning U.S. influence on world economic affairs? Long term, no question but that U.S. and China economies will become more entertwined and currency imbalances would be worrisome and mutually detrimental potentially. Where does China’s appetite for U.S. Treasuries fit in here?

  2. China is a currency manipulator. It has only allowed its yuan to appreciate at a bit under seven percent in a year. If the U.S. Congress does not pass the Currency Reform for Fair Trade Act of 2010 (H.R. 2378) now, it just won’t happen. H.R. 2378 is the bill that will treat an undervalued currency as an unlawful subsidy that can be remedied by slapping duties on selected Chinese goods. For a little while it was looking like China might respond to all this external pressure, as the yuan did rise since mid-June. Now, though, without pressure from the U.S., the yuan is not going to appreciate. In fact, the more likely scenario is seeing the yuan replace the U.S. dollar as the new world currency.
    I know I believe the G20 failure was huge for China—the country is set to take over, and the more days that pass in Congress’ lame duck session, the less likely H.R. 2378 will pass, and the more likely America’s economy will continue spiraling deeper into its deficit. Letting this manipulation go unpunished (for lack of a better word) paints a not-so-pretty picture in my head—Chinese President Hu Jintao laughing at poor little America as he dumps all the U.S. Treasury bills he bought. I really do hope this nightmare does not come to fruition.

  3. The following article adds an interesting wrinkle to this discussion:

    http://www.nytimes.com/2010/11/16/business/economy/16exports.html?scp=7&sq=currency&st=cse

    In it, the author discusses how a rebalancing of currencies may not necessarily result in more American jobs. The reason? Many US corporations making products for overseas markets already make them overseas. This means that they do not deal in both currencies and therefore, are not affected by fluctuating exchange rates. Additionally, many American companies making products on American soil for sale abroad purchase component parts abroad. This means that as the dollar falls, their production costs increase. With higher costs, they must now charge more for the final product, effectively negating the supposed benefits of a falling dollar.
    In addition to these concerns, I would add the following: If the many goods we buy from China go up in price, rather than switching to American goods, isn’t it likely we’ll just buy fewer goods in general? Buying less will result in lower profits for U.S. retailers, likely leading them to layoff more workers. Under this scenario, the trade gap is narrowed, but the drop-off in total demand leads to more U.S. job losses. From an environmental perspective, less consumption is a good thing. From a job-growth perspective? Not so much.
    Conclusion: Economically speaking, we appear to have drifted up some murky, brownish creek. The apparent absence of a paddle has undoubtedly worsened our situation.

  4. I think New York City Mayor Michael Bloomberg provided some applicable commentary at the Hong Kong C40 conference. In a nutshell: stop blaming the Chinese. On the one hand, I do not doubt that China is purposefully keeping the Yuan’s value low, harming our ability to remain competitive. At the same time, the currency issue is a cover for a more pressing matter: the loss of American ingenuity. In the end, if America loses its pre-eminent global status, it will not be because of currency rates. Long term, the United States can remain a leading superpower by investing in education and research and development. This way, the next great idea is created in the United States: not China. Like the internet and automobile revolutions, U.S. dominance is centered upon goods high up the value chain. The United States should not envy China because it can produce low value goods cheaply. We are not in a race to the bottom. Furthermore, the currency issue shrouds the fact that China finances our debt habits. One of the largest holders of U.S. securities, China’s reserves amount to over $1.2 trillion dollars. This keeps interest rates low allowing the U.S. to borrow cheaply for TARP, stimulus, auto bailouts, social security, Medicare, Medicaid, and virtually every government program. Let us just say America better start innovating. And fast.

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