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.