Politicians just can’t leave well enough alone. Once again we hear the drumbeat of concern over the alleged fact that China’s has “manipulated” its currency—by keeping it too weak—and how that harms the U.S. economy. Yet nothing could be further from the truth.
To begin with, the Chinese yuan has appreciated by 23% since China’s central bank first decided to peg the yuan to the dollar at the beginning of 1994—almost seventeen years ago. The Chinese economy has had plenty of time to adjust to its current currency regime, and if that weren’t enough, the currency has appreciated significantly in the interim. Moreover, the Chinese have recently committed to allowing the yuan to appreciate even further, as suggested in the above chart.
Leaving aside the issue of whether they have kept the yuan artificially weak or not, China’s monetary policy (which is driven by pegging its exchange rate) has been successful at delivering relatively low and stable inflation: since 1996, in fact, Chinese inflation has been substantially similar to that of the U.S (actually, it has been a bit lower—2% vs. 2.5% per year). This fact alone is almost proof that they haven’t been keeping the currency artificially weak. (I’m leaving out 1994-95 since inflation in those years was temporarily boosted due to the 50% devaluation of the yuan that preceded its being pegged to the dollar.) In other words, our price level has risen about the same as the Chinese price level for the past 15 years. If the yuan had been chronically undervalued during that time, then Chinese inflation would most likely have been higher.
But let’s suppose that the currency was “too weak” when they first pegged it in 1994. If that were the case, then it is certainly a lot less weak today, since it has appreciated by 23%. If the currency were just about right in 1994, when Chinese/U.S. trade was still in its infancy, then it is arguably “too strong” today. If the currency were too strong in 1994, then of course it is even stronger today. In short, it’s difficult to make the case that the yuan has been kept artificially weak.
And even if the yuan were chronically “too weak”, what’s the problem anyway? If the Chinese want to sell us cheap goods, that’s to our advantage. True, some manufacturers here might go out of business as a result, but all consumers would benefit. Why should we pursue a policy—forcing the Chinese to appreciate their currency even more than they already have—that would disadvantage every single one of us—because a stronger yuan/weaker dollar would make Chinese imports more expensive—in order to protect a small number of businesses that are forced to compete with Chinese imports?
Mark Perry has a wonderful way of “rewriting” incoherent and uninformed policyspeak coming out of our government and our mainstream media. Here’s how he corrects an article in today’s Washington Post. It’s a jewel:
This week, committees on both sides of Capitol Hill will plumb the conundrum of Chinese currency manipulation. The conundrum isn’t that — or why — China is manipulating its currency: By undervaluing it, China is systematically able to underprice its exports, putting American (and other nations’) manufacturing consumers and businesses that purchase China’s cheap imports at a significant disadvantage. The conundrum is why the hell the United States isn’t doing thinks it should do anything about it.
There are certainly plenty of senators and congressmen — and Main Street Americans U.S. producers that compete with China — who’d like to see the White House place some tariffs taxes on American consumers and businesses who purchase the underpriced low-priced Chinese imports. If the administration doesn’t act, Congress may just consider mandating some tariffs punitive taxes against American consumers and businesses on its own.
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