Few trade policy issues get the pulse pounding faster than the value of China's currency, over which the Chinese government keeps tight control. The exchange rate is currently around 7.7 yuan per U.S. dollar—an increase in the value of the yuan since the Chinese allowed their currency to "float" in July 2005 but not nearly enough for critics of China's trade policy, including many lawmakers on Capitol Hill.
Below are the opinions of two of the most outspoken voices on the issue. Peter Morici, a former director of the Office of Economics at the U.S. International Trade Commission, is a recognized expert on international economic policy. Daniel Griswold is director of the Cato Institute's Center for Trade Policy Studies.
AMM Is China manipulating its currency?
Morici That's not a theoretical issue—its intervention in currency markets is recorded by the Bank of International Settlements and the International Monetary Fund (IMF). China consistently buys dollars in foreign exchange markets with yuan that it prints to keep the dollar expensive and the yuan cheap. This prevents the balance-of-trade deficit from correcting. They buy as much currency as they need to maintain the target rate. If they bought less currency, the value of the yuan would go up and the dollar would go down.
Griswald Currency manipulation is not a technical term with a precise and widely accepted definition. IMF Articles of Agreement allow countries enormous latitude in selecting and managing exchange rate systems. China does stand out as one of the few major trading nations that maintain a fixed currency. But to demand that China implement a freely floating currency regime in the next few months under penalty of trade sanctions is to ask of China what we are not demanding of any other country at its stage of development.
AMM Wouldn't an upward revaluation increase the price of imported products that United States consumers rely on?
Morici Those products would become more expensive. However, not all that we import from China is cheap T-shirts. It's a whole range of products, and it's at the upper ranges of the technology scale that we would see the shift.
Griswald While the critics of trade with China mistakenly focus on the alleged harm it causes, they tend to overlook the benefits. Those include lower-priced imports for U.S. consumers and businesses, expanding export opportunities to China and the economy-wide benefits of Chinese capital flowing to the United States.
AMM If you were U.S. Treasury Secretary Henry M. Paulson Jr., what would you do?
Morici I'd walk across Pennsylvania Avenue and tell Rep. (Charles) Rangel (D., N.Y.) to get the Hunter-Ryan bill on the floor to give American industry that tool to obtain redress from subsidized Chinese imports.
Griswald Imposing punitive, unilateral sanctions against imports from China because of its foreign currency regime would be a colossal policy blunder. Trade sanctions would, of course, hurt producers and workers in China, but they would also punish millions of American consumers through higher prices, disrupt supply chains throughout East Asia, invite retaliation and jeopardize sales and profits for thousands of U.S. companies now doing business with the people of China.
AMM What if nothing is done?
Morici The U.S. already has a $6-trillion debt as a consequence of this, and it goes up $50 billion a year. The debt service comes to $2,000 per worker. That lowers U.S. productivity growth, research and development, and so forth.
As a result, we will be diminished to a second-rate industrial power and we will have to live with China making the rules.
Griswald America's commercial relationship with China is not a crisis that demands urgent action on the part of the U.S. government. People in both nations are benefiting from rapidly growing and generally normal trade and investment relations. The Chinese government should continue to move steadily toward a more flexible currency, with the goal of allowing the value of the yuan to be set freely in global foreign-exchange markets alongside the currencies of most other major trading nations.