What to do about China's currency?

Topic A
Sunday, October 10, 2010

With the Obama administration stepping up pressure on China to change the way it manages its currency, The Post asked experts and legislators what can be done. Below are contributions from C. Fred Bergsten, Mark Zandi, Douglas Holtz-Eakin, Kenneth Lieberthal and Rep. Sander M. Levin.


Director of the Peterson Institute for International Economics; assistant secretary of the Treasury for international affairs from 1977 to 1981; co-author of "China's Rise: Challenges and Opportunities"

China's massive intervention in the foreign exchange markets has produced an undervalued currency that subsidizes all Chinese exports by at least 20 percent and protects all Chinese imports by at least 20 percent. The U.S. global trade deficit is $50 billion to $100 billion higher and perhaps 500,000 good jobs in this country are displaced as a result. Moreover, China's actions have unleashed worldwide currency conflicts that threaten to replicate the spiral of competitive devaluations that deepened the Great Depression in the 1930s.

Sweet reason and polite international negotiations have failed to resolve the issue for seven years. The bill passed by the House on Oct. 1, to authorize the imposition of countervailing import duties against specific foreign products subsidized by a deliberately undervalued currency, is a useful initial response. So is Treasury Secretary Timothy Geithner's conditioning a greater role for China in the International Monetary Fund on its currency cooperation.

But three additional measures are needed to persuade China to let its currency rise by 20 to 25 percent over the next two to three years. Geithner must label China a "currency manipulator" in his next report to Congress due on Oct. 15; the United States cannot mobilize international support on the issue unless it is willing to indict China itself. The United States and as many allies as possible should seek authority from the World Trade Organization to impose restrictions on all imports from China until it eliminates the misalignment. Most important, the United States should counter China's manipulation with countervailing currency intervention of its own: We should buy yuan-denominated assets to offset China's purchases of dollars and henceforth directly neutralize any further distortion of our exchange rate.


Chief economist at Moody's Economy.com

In an ideal world, China would allow its currency to appreciate some 5 percent each year for the next five years. A yuan that is 25 percent stronger would be appropriately valued, and the U.S.-China trade imbalance would fade, no longer threatening the relationship between the two countries and, by extension, the global economy.

U.S. policymakers need to do (and should do) very little to achieve this. The economic logic of reforming China's currency policy is compelling, for China as well as the United States. A stronger yuan would enrich Chinese households, lowering their cost for imported goods. It would also enable China to purchase the global assets it covets, from U.S. technology to African raw materials.

This logic guided Chinese policy before the Great Recession, with the yuan rising almost 20 percent between summer 2005 and summer 2008. Chinese authorities reasonably halted further moves when the global financial panic hit, but in recent months, with more stable conditions, they have resumed revaluation. It hasn't been as fast as policymakers would like, but it signals that the Chinese accept the logic behind a more flexible currency.

U.S. policymakers may be tempted to use a stick, such as greater tariffs on Chinese imports, to induce faster currency appreciation. But this would be counterproductive, stifling both Chinese imports and, as China retaliates, U.S. exports. This is a scenario for a new global recession. Currency revaluation is vital and logical, for China's own sake as well as ours, but the case must be accepted on its merits, not because of threats.


Former director of the Congressional Budget Office; senior economic adviser to Sen. John McCain's presidential campaign

There is no more vexing issue in U.S. economic policy than China's currency. China has amassed a historically large hoard of currency reserves. It did this at a time when Chinese government policy prevented its currency from responding to market forces. If this is not currency manipulation, it's hard to know what is. Still, the scope of the manipulation is far from clear. Credible estimates of undervaluation vary considerably -- from as low as 12 percent to as much as 50 percent.

So what is to be done? History is instructive. During the 1950s and 1960s, the Soviet Union confronted the United States with an alternative economic model, with spillovers to other issues ranging from human rights to national security. Soviet-style economics proved to be a vastly inferior economic model, and I suspect the same to be true of China's mix of market forces and totalitarian politics. The United States ultimately succeeded through the efforts of an alliance of like-minded Western democracies.

The same approach should be applied to the Chinese currency: explicit norms set by like-minded countries. This need not be done through an existing international forum such as the IMF or the Group of 20 major economies. A smaller and more focused group could convene to address currency valuation while also tackling the underlying issues of national saving, investment and consumption.


Senior fellow and director of the John L. Thornton China Center at the Brookings Institution

The currency legislation that the House passed is both toothless and harmful. Toothless because it requires cumbersome, case-by-case actions that in toto cannot seriously affect the U.S.-China trade balance. Harmful because it frames this global problem as a bilateral issue, diverting attention from multilateral efforts. A bilateral approach also empowers critics in Beijing who argue that this is a U.S. tactic intended primarily to upset China's stability and growth.

China's currency policy seriously exacerbates global imbalances -- imbalances that threaten to compel other governments to hold down the value of their currencies in order to promote exports. No country wants its currency to rise while others hold steady or fall. But this global problem should be handled primarily through multilateral mechanisms, with the G-20 playing a leading role, because the currency issue fits squarely into its broader focus on multilateral reforms to promote strong and sustainable growth.

America should implement existing trade law, bring cases where China violates WTO rules, and, especially, work hard at the Group of 20 and elsewhere to achieve a multilateral consensus on sustainable currency practices. These measures can work better because Beijing cares a lot about the views of other developing countries but instinctively resists unilateral American pressure.


Chairman, House Ways and Means Committee

House Democrats took major legislative action because China's persistent currency manipulation -- part of its overall economic strategy -- was costing American jobs by making China's goods cheaper and U.S. goods more expensive. China promised to adopt currency flexibility, but as too often has been the case, it has not implemented this promise to fulfill international obligations. And there has not been effective multilateral action on what is increasingly a global problem.

The House legislation replaces rhetoric with action. It is crafted carefully to be consistent with our World Trade Organization obligations. It would provide meaningful relief to U.S. businesses and workers by allowing duties to be imposed to offset the effects of an undervalued currency. To thrive, international trade must have rules of competition. Americans need their elected representatives to stand up for them and hold our trading partners accountable to the rule of law. Through this action, the House sent a message that China's currency manipulation, a unilateral and protectionist measure, cannot stand. We must embark on a comprehensive strategy, including multilateral action, to enforce the rules of trade and allow our businesses and workers to compete and win in the international marketplace.

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