WASHINGTON — Say there was a way to create a half-million American jobs over the next two years without adding a dime to the debt or deficit. And say it would also revive moribund Rust Belt factories, reduce the country’s gaping trade deficit and help stabilize the international economic system.
All of this would occur, some economists say, if only China would stop manipulating its currency, keeping it artificially undervalued as a means of boosting its exports and fueling its tremendous economic growth.
Anger over China’s exchange-rate policy nearly boiled over in Congressional hearings last week. Treasury Secretary Timothy F. Geithner accused China of violating international norms. President Obama plans to press the currency issue, along with complaints about China’s policies on trade and intellectual property, at the Group of 20 summit meeting in South Korea in November.
That China has undervalued its currency, the renminbi, for much of the past decade to boost its surging export-driven economy is not seriously doubted; China intervenes in the markets by buying an estimated $1 billion a day using renminbi. For the lay observer, it’s befuddling. Why does this situation persist?
Would China benefit by letting the renminbi rise?
Yes, most experts agree that China would probably be better off if the renminbi’s value rose. Doing so would give Chinese consumers more purchasing power, lessen the risk of inflation and asset bubbles, and potentially reduce stark inequalities that have contributed to social unrest.
What’s stopping China, then?
Exporters, concentrated along the southern coast, wield enormous clout in Beijing and benefit from an undervalued currency, said Minxin Pei, a political scientist at Claremont McKenna College in Claremont, Calif. So do state-owned enterprises, which have excess capacity and need to be able to sell goods cheaply abroad. China’s importers are unhappy with the undervalued renminbi — as are officials at the central bank — but both groups are relatively weak.
In the United States, there must be someone against a stronger Chinese currency, right?
Large multinational corporations, and Wall Street, are comfortable with a weak renminbi. Many of the biggest American conglomerates make goods in China (or sell them in the United States) and benefit from the undervalued currency. Financial services companies find deal-making easier with a strong dollar and want to help invest the capital sloshing around China.
But aren’t the forces on the other side just as strong?
A high dollar places tremendous competitive pressure on American agricultural producers and domestic manufacturers, and thereby hampers job creation.
So, it’s not surprising that Midwest politicians and labor unions have been among China’s fiercest critics. High unemployment has also prompted the White House and most Congressional Democrats (and a substantial number of Republicans) to side with the critics.
How have previous problems with a strong dollar been handled?
In the late 1960s, rising federal spending during the Vietnam War and the Great Society pushed inflation upward. The United States had a trade deficit for the first time in the postwar era. Manufacturers were furious. President Richard M. Nixon responded by taking the country off the gold standard in 1971, which caused the dollar to fall by about 20 percent.
From 1981 to 1985, the dollar soared again, as the Federal Reserve boosted interest rates to combat inflation and the Reagan administration borrowed to finance big budget deficits. In September 1985, Treasury Secretary James A. Baker III met Japanese and German officials at the Plaza Hotel in Manhattan. Faced with threats of protectionist action by Congress, the two countries agreed on a plan to devalue the dollar.
So, could such an agreement happen again?
A rapid devaluation of the dollar is unlikely anytime soon. No country, even an ally, wants to see its currency suddenly rise in value (and its exports become more expensive) amid a fragile global recovery. The international monetary system has also gotten more complex, with the creation of the euro and the rise of large emerging economies like Brazil, India and Russia.
Though China allowed its currency to rise by more than 20 percent against the dollar from 2005 to 2008, the financial crisis (which led investors to flock to the dollar) led to a return to old ways. In June, Beijing promised greater exchange-rate flexibility, but since then the renminbi has risen by only about 1 percent. Too little, too late, Mr. Geithner testified last week.
Ultimately, says Jeffrey A. Frieden, a Harvard political scientist, exchange rates reflect broader macroeconomic forces. For the dollar to get back in sync, Americans must save and invest more and consume and borrow less, and the Chinese, Germans and Japanese have to recognize that excessive reliance on exports is not to their long-run advantage.
“It’s conceivable that the Chinese might conclude it’s in their own self-interest to let the currency rise,” Professor Frieden said, “but it’s not going to come from browbeating and it’s not even going to come from well-meaning attempts at cooperation.”
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