The question is unavoidable in the wake of a new report by Joseph Gagnon of the Peterson Institute entitled “Combating Widespread Currency Manipulation.” The headline finding is that countries seeking to hold down the value of their currencies now distort global capital flows to the tune of $1.5 trillion a year. The result, says Gagnon, a former economist at the Federal Reserve, is a “net drain on aggregate demand in the United States and the euro area by an amount roughly equal to the large output gaps” in these nations. Bottom line: “Currency manipulation is responsible for millions of lost jobs in the United States.”
Gagnon’s data shows that while some surprising countries (such as Denmark and Switzerland) are rigging exchange rates, China’s scale makes it the 800-pound panda here.
Worse, both parties have caved for years in the face of China’s bare-faced mercantilism — thanks to risk aversion and negotiating incompetence that have betrayed American workers. That’s the case made by H.W. Brock in an important yet underappreciated book published this year: “American Gridlock: Why The Right And Left Are Both Wrong.”
Brock, who runs the advisory firm Strategic Economic Decisions, says the first thing to understand is that China’s willingness to let the yuan appreciate by nearly 30 percent since 2005 does not mean (as the IMF declared Tuesday) that the problem has essentially been solved. We need to take a longer view.
As Brock shows, the yuan “is worth well under half what it was worth when the Chinese economy was in shambles as late as the early 1980s.” Between 1990 and 2011, moreover, the yuan depreciated by 46 percent versus the dollar. This is the opposite of what you’d expect in a booming developing nation that’s drawing overseas investors who lift demand for its currency (and the opposite of what happened to the yen as Japan rose, for example).
Brock reckons that the yuan’s value in dollar terms is arguably one-sixth of what it should be. He calls Washington’s failure to do anything about it a “political disgrace.” In his view, we should have conditioned China’s entry into the World Trade Organization a decade ago on a phaseout (over five years, say) of the country’s currency games, IP theft and related practices. If China failed to comply, we and the world should have imposed punitive tariffs.
Instead, by letting China rig the game, Brock argues, we’ve let slip priceless intellectual property and become a huge net debtor. What’s more, by letting the currency issue fester unaddressed for so long, we’ve encouraged multinational supply chains to become so dependent on Chinese operations that steep tariffs now would not only hurt China but the West as well.
During a critical decade, in other words, we let China eat our lunch.
Let me be clear: China’s rise as an economic power is a good thing for the world, and a great thing for the Chinese people. China is not the source of all our economic woes. But China’s brazen currency manipulation and routine theft of American intellectual property has tilted the playing field unfairly against U.S. jobs. We’d have lost jobs as China rose in any event. But these losses have been far larger than they would have been had our leaders not stood idly by as Beijing spent trillions buying dollars to keep its currency (and thus exports) cheap.
Why did our leaders fail to act? The apologists say the geopolitical situation is too delicate for such hardball. We want China to take its place in the community of nations. We don’t want China to implode as it rockets from third world to first. Beijing needs to create zillions of jobs each year lest it face social instability. Let’s cut them some slack, we’re basically told.
Well, yes, but. China’s challenges are real. But so are the challenges facing this nation’s eroding middle class (and the 23 million people seeking full-time work who can’t find it). It suits China’s interests to have American leaders thinking the place is a powder keg that could blow if pushed to reform too quickly.
If Brock is right, these rationalizations mean leaders in both American parties have been cowed into abandoning American interests.
When the other guy isn’t playing fair, after all, standing up to them isn’t “protectionism” — it’s economic self-defense. Doing nothing in the face of China’s behavior means playing the patsy.
Tim Geithner has occasionally jawboned China over currency values. Geithner also sent a strongly worded e-mail to the Brits on Libor rigging. We know how effective that was.
But the issue may finally be joined. On Monday, the latest step in China’s march to lock up global resource supplies came with state energy giant Cnooc’s record bid for Canadian producer Nexen (a deal U.S .regulators will have a role in reviewing). On Tuesday, Romney, who called China a currency manipulator early on, repeated the charge in his speech to the VFW. He plans on painting Obama as soft on Beijing.
Still, if Romney got rich at Bain in part by tapping China’s unfair advantages, how can he offer himself as the man who can bring China to heel?
Matt Miller, a co-host of public radio’s “Left, Right & Center,” writes a weekly online column for The Post. His e-mail address is firstname.lastname@example.org.