Blocking the Exit: Currency Management

October 3rd, 2011 at 8:31 am

I’ve long supported the China currency bill that the Senate is taking up today, thanks to some persistent nudging by Ohio Senator Sherrod Brown.  Last year, the bill sailed through the House with 99 R votes, making it one of the few bipartisan pieces of legislation this town has seen in recent memory.

There is no question that China manages its currency, the RMB—the picture below compares the RMB/$ with the British pound/$.   The latter wiggles about like a value set by unfettered exchange rate movements—the other doesn’t.

Source: FRED database

And there’s little disagreement that China’s currency management hurts job growth here by making our exports less competitive (i.e., more expensive than they would be if the RMB could freely appreciate).

More urgently, what’s going on now is that China’s currency management is jamming a key adjustment mechanism that we badly need to help us out of the mess we’re in.  When the economy tanks, interest rates tend to fall, along with the value of the dollar (note: all you crowding-out freaks take notice: the budget deficit is highly elevated yet interest rates are at historical lows).  This should help boost exports along with growth and jobs.  But if someone prevents the exchange rates from adjusting the way they naturally want to, that exit route gets blocked.

[BTW, notice the similarity to the fiscal policy problem: economic variables are moving around much the way they should under recessionary conditions: interest rates are low, shouting to the federal gov’t to use fiscal stimulus—same with the dollar and exports…]

The bill simply increases the administration’s ability to take action in the World Trade Organization against countries who manage their currencies to boost exports, something that’s actually too hard to do right now (in the arcane world of trade disputes, currency management isn’t on a par with stuff like dumping or other more explicit trade barriers).  It’s also not nearly as sweeping as some opponents seem to believe.  For example, you have to bring the cases one export good at a time, and each case will take months to investigate.

But that’s OK—China has historically been quite responsive to even mild threats of action on currency—in fact, it’s worth watching for any RMB appreciation in coming days, depending on how the vote goes.  The problem is if we don’t do anything real on this—something that sticks—as the figure above shows, they soon revert to their dollar-pegging ways.

I understand there are reasonable objections to this bill and the more explicit approach it takes to addressing the problem—see the link to the Reuter’s article above (though note that it’s our side that’s for market forces and free trade here).

But what I don’t hear enough of from the objector class is what their plan is.  Unless you’ve got a better idea to pushback against the currency management that’s hurting our manufacturers, blocking our exports, and making it tougher to recover, then get out of the way and give this bill a chance.  You’re blocking the exit.

Update: This AM WaPo’s editorial against the currency bill is a good e.g. of an unsatifying set of half-baked reasons to be against this with no offer of an alternative solution.  They argue it won’t solve the whole problem of unbalanced trade, it wouldn’t create enough jobs, China is already revaluing, they’ll retailiate (i.e., they can come after us, but we can’t fight back)…and instead of pressing for currency value to be set in markets, the President should pass free trade bills.  That’s all extremely weak green tea.

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7 comments in reply to "Blocking the Exit: Currency Management"

  1. jhm says:

    Not to be too negative, but even if this thing passes, and is signed, what makes anyone think that this, or any, administration will use it?


  2. Dan Furlano says:

    My opinion about the issue of China (or any country) maintaining a weak currency that promotes an increase in trade imbalance is that the US needs to really think outside the traditional paradigm of balanced trade as the only right outcome.

    If China want to suppress their currency and sell the US products which they can “produce” at significantly lower prices then I think that is better for the US in the long run.

    China is taking REAL assets and basically giving them to the US for dollars which cost the US nothing to produce.

    The only thing the government should be doing is taking the imbalance in trade and supporting the economy by spending the same notational amount.

    As an example if the trade imbalance is $200b the government should create $200b in direct spending that either buys services or goods produced in the US or on infrastructure projects that support US jobs.

    That way the US gets $200b of real assets for nothing and supports the notational amount in spending. It is not only sustainable but sooner or later China is going to not want to support a cheap currency.

    I have not heard of a good reason not to do this.


  3. perplexed says:

    It’s unfortunate(and extremely dangerous)that the VSP’s have so seriously hamstrung our government’s ability to get us out of this crisis; but here we are, and this one’s a no brainer. So look for them to find a way to sideline this issue until after the election. Unemployment is really not much of problem for them, unless of course it goes away or even begins to decline; they won’t want to risk it if they can find a way not to.


  4. Carol says:

    Don’t we export more from China than we do from the United States?


  5. Who’d a Thunk It? | Jared Bernstein | On the Economy says:

    [...] China currency bill I wrote about this AM got over the first procedural hurdle in the Senate this afternoon, getting cloture by 79 to 19. [...]


  6. AR says:

    Obama won’t back this bill because of fears of a trade war with China…

    Why don’t these polling firms ask us, the American people, how willing WE would be to endure a trade war with China, if it meant FINALLY beginning to nurse our manufacturing sector back to health??

    A LOT of us are willing to stop buying unneeded cheap electronics and trinkets that barely last through next month, much less next year, if it meant FINALLY plugging the massive drain in our market, called underpriced Chinese goods, that has been sucking any life/stimulus out of our economy, as soon as it enters it.


  7. Steve Maricic says:

    I think we need a graduated tariff. If, in 2011, any country sells us 5% more than we sold them, then we should charge a tariff of x% on any goods they sell us in 2012. If they sell us 10% more, we should charge a tariff of 2x %, and so on. Start with x equal to 1% for a few years, and see if that has the desired effect — which is the lowering of our trade deficit with that country to near zero.
    This avoids singling out China by name. If any country wants to retaliate with a “trade war”, we could ask that they pass the same type of law in their country. Would that not tend to bring world trade into a fair balance?
    Take the money collected and use it to lessen our budget deficit.


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