What is “Currency Manipulation”?
Posted by SCapozzola on March 17th, 2010
If you walk through the U.S. Congress right now, you’ll hear a lot of Senators and Members of Congress talking about “currency manipulation.” Specifically, currency manipulation on the part of China.
But what exactly is this currency manipulation problem?
Starting in 1994, China began to explicitly peg its currency, the yuan, to the dollar at a set, low rate. No matter if the dollar rises or falls, the Yuan remains in place with the dollar. And since the Chinese economy has been growing faster than the U.S. economy, the result is that the yuan has remained significantly undervalued. This makes China’s exports to the U.S. relatively cheaper than they should be and also makes U.S. exports to China more expensive.
The main consequence is that a flood of artificially cheap Chinese imports has driven many domestic U.S. manufacturers out of business. In fact, the U.S. trade deficit with China has risen from $30 billion in 1994 to as high as $268 billion in 2008.
China’s policy of currency manipulation is intentional, and has helped it become the world’s leading exporter. But along the way, it has also earned the ire of the EU, Japan, and the WTO for continuing what is essentially an illegal practice.
As long as China’s currency remains significantly undervalued, Beijing will continue to enjoy sizeable exporting benefits. Unfortunately, the repercussions of this are a growing distortion in world markets.
And so we come to the present moment– with five U.S. senators, including Charles Schumer of New York and Lindsey Graham of South Carolina, introducing legislation to make it easier for the U.S. to declare currency misalignment and take corrective action.
Even if their legislation stalls, this new Senate pressure may compel the U.S. Treasury Department to declare China a currency manipulator in its next semi-annual report. Such a move would initiate a federal response– something that U.S. manufacturers desperately need.
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March 19th, 2010 at 9:43 am
It seems to me that arguing about currency manipulation allows politicians to avoid discussing the real problems:
1. With Chinese wages as low as fifty cents an hour and U.S. wages as high as fifty bucks an hour (UAW fully loaded), the Chinese labor cost advantage is insurmountable.
2. We are doing business with a criminal enterprise and pretending that it is okay.
Perhaps the real truth is that the American Middle-Class has been standing in the way of the Progressives’ plan to take this country in a socialist direction. No manufacturing means no middle class.
April 5th, 2010 at 5:45 am
“But along the way, it has also earned the ire of the EU, Japan, and the WTO for continuing what is essentially an illegal practice.”
Wasn’t the US the main advocate of Chinese entrance into the WTO in 2001? Why did the US let them into the WTO lowering most if not all tariffs levied on Chinese imports!?
April 5th, 2010 at 9:21 am
Yes, Jose, some in the U.S. pushed heavily for exapnded trade with China. But unfortunately, we haven’t enfoced our trade laws adequately since then.
April 14th, 2010 at 11:29 am
[...] to Washington for Obama’s nuclear security summit he would have to have a serious chat about currency with President Obama and Secretary Geithner. Hu also knew that he wasn’t ready to [...]
May 19th, 2010 at 11:51 pm
I think this problem is much deeper than is being published. China has been labeled a currency manipulator and is a member of the WTO since 2001 this subject has had to have been in occurrence before and during their first initiations of the WTO. Also these topics and changes are very tedious and relative as is science so the signs had to be visible beforehand.
June 22nd, 2010 at 6:31 am
[...] economists estimate that the yuan is undervalued by up to 40 percent. So, unless we see a 40 percent increase in the value of the yuan compared to the dollar over the [...]
June 22nd, 2010 at 9:13 am
No, currency manipulation is a real problem all right. Sure Chinese workers make 50 cents an hour- but consider they also live in free housing, get free food and many other free services. I’m not saying that number is accepatable, but you cannot directly compare their wages to an American worker- it is a Communist country after all.
The 1994 to 2008 trade balance shift presented here really says it all. China’s currency strategy is what is causing us to shift more and manufacturing over there- more so than there cheap labor and lax regulations. Until we address that, we will never be able to compete with their growth.
June 22nd, 2010 at 1:44 pm
[...] economists estimate that the yuan is undervalued by up to 40 percent. So, unless we see a 40 percent increase in the value of the yuan compared to the dollar over the [...]