Odds are that Mitt Romney’s promise to brand China a “currency manipulator” will figure heavily in tonight’s foreign policy debate. There’s good reason for that. Branding China a “currency manipulator” is popular! That’s why almost every presidential candidate promises to do it. But it also doesn’t make much sense, which is why presidents typically don’t do it.
More importantly, though, it is, at this point, an out-of-date argument. The “currency manipulator” question made a lot of sense in 2000 or 2004 or 2008. It doesn’t make much sense in 2012. But the political conversation on this issue, as so often happens, hasn’t quite caught up to the facts. It’s missing the substantial improvements China has made in recent years, and the role that other actors now play in global currency manipulation. Here’s what you need to know:
1) What you’re saying when you say you want to put an end to global currency manipulation is that you want a weaker dollar. That’s what currency manipulation is: An effort by other countries to artificially strengthen the dollar in order to make their currency — and thus their exports — comparatively cheaper. But if we want to weaken our dollar, we could just, you know, weaken the dollar.
2) China is not the world’s worst currency manipulator, or even particularly close to it. Singapore is worse than China. Taiwan is worse than China. These days, Switzerland and Japan are arguably worse than China. And there are other countries, like Israel, who aren’t worse than China, but who are still pretty bad. Here’s a list (which, for technical reasons, doesn’t include the role of Sovereign Wealth Funds) from Joe Gagnon, an economist at the Peterson Institution for International Economics who has been tracking currency manipulation:
Now, most of these countries are also much smaller than China, so we care about them a bit less. But still, it’s hard to take aim at China when so many other countries are getting worse. To the Chinese, it looks like you’re singling them out.
3) China is getting much better. They’ve allowed their currency to rise substantially in recent years. Gagnon told me that China’s ”current account peaked at 10.7 percent of GDP in 2007. This year, it looks like it’ll only be 2 percent.” It seems a bit weird to intensify the pressure on China, and to try and publicly humiliate them, at the exact moment when they’re doing what we’ve been asking them to do. As economist Nicholas Lardy told NPR, ”there was a very good case for the [U.S.] to take action against China five years ago, but not now.”
4) Calling someone a “currency manipulator” doesn’t trigger some magical process that leads to them no longer manipulating their currency. On its own, its nothing but an international insult. But if you follow through, then it’s a first step towards slapping tariffs on Chinese goods. But then China can begin slapping retaliatory tariffs on our goods. Does anyone think that a trade war with China would be a good thing right now? If so, why?
5) Many experts think calling China a “currency manipulator” will backfire. China, at times, seems to run a pride-based foreign policy. If the rest of the world demands they do something, they simply refuse to do it. After all, it doesn’t look good to ordinary Chinese if China is permitting America to set its monetary policy. Thus, if you want to call China a “currency manipulator,” you need an explanation for why that’s a better strategy than the one we’re following, which has actually led to China permitting its currency to appreciate. “Getting tough” is a posture, not a policy argument.
For the record, there are experts, like Gagnon, who believe that the United States needs to think about how to get tougher on currency manipulation overall. He’s got some ideas on how to do that here. But the case to just get tough on China, and to do it by trying to humiliate them on the world stage, is much weaker today than it was five or eight years ago.