| OCTOBER 13, 2011 -- I’m sure most of you have heard about the controversy over China’s currency manipulation. This has become a difficult issue for many in Congress, especially the GOP, as they are torn between defending free-trade agreements and preventing more jobs from going overseas. There is currently a bill up for debate in the Senate which seeks to crack down on China’s currency practices, yet it is seeing mixed support on both sides of the aisle, and for good reason. On one hand, a standing pillar of free-market economies is their ability to conduct themselves free of government intervention and manipulation. On the other hand, states are losing thousands of jobs because manufacturers are sending business overseas where their goods can be made and distributed at a fraction of the price. This is a sticky subject, and one that deserves a closer look.
Economists and central banking experts have made millions writing books about how and why a country manipulates its currency, but I’ll do my best to give you a quick breakdown here. The why is simple: to keep their goods cheap to other countries so they will purchase them; stimulating the economy exporting the goods. The how is a bit more complicated. Before 1971, the global currency market operated on what is called a “fixed parity exchange rate system.” In this system, the value of all currencies was set in terms of the United States dollar, and the dollar was valued in terms of gold, aka- the gold standard. Back then, countries were banned by the IMF from changing their exchange rates by more than 10%. After 1971, the IMF changed the rules to say that countries were allowed to use any system of exchange they liked, either fixed or floating. However, they were “supposed to” follow certain “guidelines” for establishing the value of their currency. It gets increasingly complicated from there, but the key words to note are “supposed to” and “guidelines.” Currently, the IMF cannot order a country to change its currency; it can only survey a country’s practices and make suggestions. In other words, until the rules change (don’t expect that anytime soon), China isn’t doing anything technically illegal for which they can be reprimanded.
In addition, it must be said that while China’s currency manipulation is being deemed unfair, and it is definitely to an extreme at this point, it would also be unfair not to tell the whole story. In reality, China isn’t doing anything that other central banks, including our own, don’t do all the time. The Federal Reserve is exclusively in charge of controlling monetary policy and manipulating the value of the dollar is a major portion of that. Every central bank is structured differently and thus conducts itself in very different ways. For a quick example, one can actually buy stock in Brazil’s central bank while that is not an option in most other countries. Bottom line, currency exchange is not a perfect system and every country manipulates it to some extent. Nonetheless, China has abused this privilege to a point of recklessness and the U.S. should not continue tolerating such practices.
Yet here we are. Chinese goods are incredibly cheap, though artificially so, and in turn, our goods are too expensive for them to purchase. Here is where the Currency Exchange Rate Oversight Reform Act of 2011 (S.1619) comes in. The bill requires the Treasury Department to decide if a foreign currency is in “misalignment” and if so, begin a negotiation process with that country to correct the imbalance. However, don’t get too excited yet. Should that country refuse to negotiate, the most the United States could do is impose tariffs on those goods, or establish bans on the purchase of certain goods. China owns over $273 billion of U.S. debt, making a trade war very risky, and turning many in Washington off of the whole thing entirely. Nonetheless, in the last 10 years alone, an estimated 3 million jobs have been lost to China. With an unemployment rate over 9%, we cannot sit back and do nothing.
Even if S.1619 passes the Senate, it would likely get opposed by the House. While it could pass, it’s an issue that remains too sticky for some in Congress to confront. In their defense, the consequences of generating a hostile trading relationship with China could be adverse and counterproductive. The bill is being heard in the Senate today and we’ll see what happens if it makes it to the House. Either way, America’s best bet is to get this country back on its feet and regain some leverage with its most competitive trading partner. That isn’t impossible and I have every faith that we can and will prevail from this sticky situation.
-Grace Boatright
National Grange Programs Assistant |
