America and China share a terrible delusion. They are in denial about currency manipulation. Both officially state that China is not devaluing its currency.
In mid-March, Chinese Prime Minister Wen Jiabao flatly denied that China deliberately suppresses the value of its currency against the dollar, a practice that decreases the price of its exports and increases the cost of America goods imported into China. Similarly, the U.S. Treasury Department, which is required by the Omnibus Trade and Competitiveness Act of 1988 to name foreign currency manipulators in bi-annual reports, has not in the past decade and a half called out China — including in the past two reports submitted during the Obama administration.
China and America decline to acknowledge what everyone else knows: China suppresses the value of its currency to gain a trade advantage over America. The New York Times reported on the practice in a story published March 14 describing how currency manipulation has worked wonders for Chinese industry while killing American manufacturing.
Treasury Secretary Timothy Geithner came to Pittsburgh, home of the United Steelworkers’ International Headquarters, this week to talk about the competitiveness of U.S. manufacturing. He visited a modern Allegheny Technologies Inc. specialty steel mill and met privately with business and union leaders. We deeply appreciate his time and attention. What he must do now, as a first step in leveling the playing field with China, is insist that the Treasury label China as a currency manipulator in the next report, which is due April 15.
That would end the denial – at least on the U.S. side — and could set in motion sanctions to reduce the manipulation or at least the effects of it. Ending the imbalance would create between 1.5 million and 3 million U.S. jobs, without Congress passing a new stimulus bill, without adding a dollar to the national debt.
America has talked to China about this problem for too long. Three years ago, AFL-CIO President Rich Trumka, who was then the federation’s secretary-treasurer, wrote that over the previous seven years warnings had proved worthless:
“The script is always the same. The Treasury Department admits there is a problem but can’t find a technical violation of the law. Then comes a warning against Congress taking action that is followed by a promise of increased dialogue with the Chinese government.”
That dialogue never produced effective results. China briefly allowed its currency value to increase by about 15 percent against the dollar from July 2005 to July 2008. China stopped the revaluation at the height of the world economic crisis. The 15 percent rise now has been offset by increased productivity in China, according to conservative economist C. Fred Bergsten, the free-trader and currency expert from the Peterson Institute for International Economics. So the net effect of the brief Chinese currency float is zero.
Still, U.S. Trade Representative Ron Kirk is suggesting more dialogue. He told the Associated Press in Brussels late in March, “. . .my first preference is always to see if we can’t build a partnership to work with China to see if we can’t get a resolution sooner rather than later.”
This inexplicable response came after Chinese premier Wen Jiabao denied that China’s currency – called renminbi and traded in a denomination called yuan — was undervalued. And China’s Vice Commerce Minister Zhong Shan said, “It is wrong for the United States to jump to the conclusion that China is manipulating currency from the sheer fact that China is enjoying a trade surplus. . .Besides, it’s wrong for the United States to press for the appreciation of the renminbi and threaten to impose punitive tariffs on Chinese exports. That is unacceptable to China.”
It is unacceptable to America to continue countenancing China’s currency manipulation.
It’s too costly to America.
It works like this. Chinese exporters are paid in dollars. They exchange them for yuan in Chinese banks. No matter the value of the dollar on the international free market, the state-controlled market in China pays 6.83 yuan for every dollar. While the value of the dollar fluctuates against the Euro and other market-based currencies from day to day, China determines its exchange rate to be 6.83 every day.
In a market-based economy, the value of currency in an export-strong country increases. That is what would happen to the yuan if China stopped interfering in the exchange rate. Essentially, demand for Chinese goods would raise their prices. But that doesn’t happen in China because the government stops it. China’s manipulation has caused the yuan to be undervalued by between 20 and 40 percent, according to even the most conservative economists.
The result is that every time a Chinese company sells a $1 product in the U.S., it has received a subsidy from the Chinese government of as much as 40 cents.
That makes competition extremely difficult for U.S. companies that don’t get such subsidies. It is a primary cause of the U.S. trade deficit. China’s share of the U.S. non-oil goods trade deficit tripled since 2005. China accounted for 80.2 percent of the entire U.S. non-oil trade deficit with all countries in the world in 2009.
That costs the U.S. jobs. The Economic Policy Institute released a study in March showing that since 2001 when China joined the World Trade Organization, 2.4 million jobs have been lost or displaced in the U.S. as a result of the growing trade deficit with China.
Unions, industry leaders, and both Republican and Democratic politicians are all sick of the talking about manipulation. During a Congressional hearing on the undervalued yuan in March, Nucor Corp. Chief Executive Officer Dan DiMicco complained about U.S. inaction, saying, “We are in a trade war. We just haven’t shown up for it.”
In mid-March, 130 Congressmen, including 40 Republicans, sent a letter to Secretary Geithner asking him to label China a currency manipulator in the April 15 report. They also asked Commerce Secretary Gary Locke to apply countervailing duties on Chinese imports. That would be legal if China’s devalued currency is deemed an export subsidy, and they said that has been clearly demonstrated.
Just a day later, a group of U.S. senators, including Republicans Lindsey Graham of South Carolina and Sam Brownback of Kansas, introduced the Currency Exchange Rate Oversight Reform Act of 2010 to penalize countries like China that undervalue their currency to artificially discount their products exported to the U.S. The legislation, if passed, would effectively compel the Treasury Department to cite China for manipulation.
“We’re fed up,” Graham told the New York Times:
“China’s mercantilist policies are hurting the rest of the world, not just America. It helped create the global recession that we’re in. The Chinese want to be treated as a developing country, but they’re a global giant, the leading exporter in the world.”
China remains in denial. They’re so far in denial, this is what Mr. Wen said:
“I understand some economies want to increase their exports, but what I don’t understand is the practice of depreciating one’s own currency and attempting to force other countries to appreciate their own currencies, just for the purpose of increasing their own exports.”
That is exactly what China has done to increase its exports.
It requires China to essentially buy $1 billion worth of dollars a day. If the Chinese stopped currency manipulation, the value of those dollars would decline against the Chinese yuan, and the Chinese Treasury would suffer a significant loss on its investment – at the same time Chinese exports would rise in price.
That is why China continues to deny manipulation.
But every day America remains in denial costs the U.S. additional manufacturing bankruptcies and unemployment.
Secretary Geithner raised hopes that Treasury would end the denial when he said of China during his visit to Pittsburgh, “It is important that they take the steps they said they would to take their currency to a more flexible system.”
Click here to tell the Treasury Department to stop denying that China is manipulating its currency.