So, the U.S. Treasury Department decided not to brand China as a currency manipulator; The Financial Times (subscription required) leads with that story across the top of its front page and The New York Times features it on the front page of the business section. I’ve always thought this debate is misplaced or, at least, doesn’t focus on two other solutions, one easy and one not-so-easy.
The argument causing a lot of heated rhetoric is this: China’s currency, the yuan (also known as the renminbi, or “the people’s money”) is artifically undervalued. As a result, Chinese goods stay very cheap, which partly accounts for the huge trade deficit China enjoys with the U.S. Two Senators, Charles Schumer (NY) and Lindsey Graham (SC) have sponsored a bill that would impose a 27.5 percent tariff on China if it fails to allow its currency to rise.
But, while I am no fan of the dictatorship in China, the truth is the U.S. could so something simple: let the high-value of the dollar decline. A high dollar benefits tourists (for obvious reasons–you can buy more when you travel abroad) but does not help average Americans, over the long-term. Some day, we–or, or more accurately, today’s children and those yet to be born–will have to pay the piper on a huge trade deficit. A high dollar may do a lot of good things for retailers like Wal-Mart (and the fabulously rich Waltons) but, eventually, someone has to pay for the costs of record trade deficits–China already owns $750 billion in U.S. securities and that will probably reach $1 TRILLION in the next couple of years if the pace of the deficits continues. That kind of debt owed by one country to another has never been seen in human history. So, why not let the dollar decline?
The other issue is this: my own view is that, frankly, the level of the Chinese currency won’t make a huge difference because of the huge advantage China has in labor costs. As long as the authoritarian regime in China suppresses its workers’ rights, it will continue to be the industrial Mecca of global corporations. You just can’t find cheaper–and more controlled–labor anywhere in the world. If you are a U.S. worker worrying about losing jobs overseas, you should be rooting for Chinese workers getting the right to have unions and breaking loose to push wages up; there are, in fact, regular protests and wildcat strikes in China which may portend a massive social upheaval driven by vast legions of rural poor who want a share of the rapidly developing economy.
