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To call China a “currency manipulator” sounds harsh and accusatory. It’s more diplomatic to say that the yuan is “fundamentally misaligned.”
That is the language of legislation that the Senate will vote on this week. While the bill’s language is tempered, its goal is not. The bill would impose duties on Chinese imports to counter the country’s undervalued currency (because a weak currency gives China an ‘unfair’ trade advantage).
To do that, the Commerce Department would estimate currency undervaluation when it calculates “countervailing duties” on imports that are considered subsidized by China’s weak currency.
The Economic Policy Institute says that our trade deficit with China has cost around 2.8 million jobs over the past decade. Lawmakers that support the bill say that it could create as many as 2 million jobs. And there is “nothing, nothing we can do to create jobs better than by correcting China’s trade imbalance,” according to Senator Chuck Schumer.
As good as that sounds, the White House hasn’t supported the bill. Maybe that’s because attacking China’s currency would do nothing more than threaten a trade war.
There is no question that China’s currency valuation has contributed, at least in part, to global trade imbalances. But slapping tariffs on China and arguing for a stronger yuan won’t solve any problems.
A stronger Chinese currency doesn’t automatically translate to a shift of the trade balance. That’s because today’s global trade involves the movement of intermediate goods, and the value of inputs accounts for half of the value of Chinese exports. So if the yuan is stronger, the goods that China imports to make products become less expensive…and in turn that can lower the cost of Chinese exports to the U.S.
Since June 2010, the yuan has strengthened 7% against the dollar…but the bilateral trade deficit is on course to rise 34% in 2011, compared with last year. So pushing for a stronger yuan could have almost no impact on the trade balance, other than to antagonize China.
Even if a stronger yuan resulted in a narrower trade deficit, it wouldn’t automatically translate to job creation. Looking back over the past 20 years, there is no definable relationship between a reduced trade gap and more jobs. If anything, a higher trade deficit has been met with higher employment.
(Click chart to expand)
Source: cato-at-liberty.org
The yuan has risen 20% relative to the dollar over the past five years…but the jobs picture hardly looks better for it.
Focusing on China’s currency is nothing more than a political diversion. Congress needs something to pin our economic problems on, so why not blame China and its 'currency manipulation'?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Source: Tariffs On Chinese Imports A Job Creator?