Treasury refuses to brand China a "currency manipulator."
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Wednesday, December 20, 2006
I am puzzled that so many smart people--in and out of government--seem convinced that revaluing the yuan against the dollar will narrow the U.S. current account deficit.
It won't. The current account deficit is the difference between savings and investment. The U.S. saves substantially less than it invests, and as a result it has a current account deficit equal to the difference (good discussions can be found here and here). A currency realignment will narrow the current account imbalance only if it raises U.S. savings or reduces investment in the U.S.. There is very little reason to believe that revaluing the yuan will have either effect.
Because I am disinclined to believe that smart people fail to understand this, I am compelled to look elsewhere to explain the obsession with China's exchange rate. The most obvious alternative candidate is old fashioned trade politics.
Schumer-Grahamism (wherein we impose a 30 percent tariff on Chinese goods) and yuan revaluation are substitute policies not because both will correct the current account imbalance (for neither can). They are substitutes because both benefit American traded goods producers. A 30 percent tariff and a 30 percent yuan revaluation each raises the dollar price of Chinese goods sold in the American market. This makes it easier for American producers to sell their higher-priced products to Americans. Recognizing these potential gains, American traded goods producers pressure Congress. Congress pressures the Bush administration to get serious about the "China problem". Given that Graham is from South Carolina (think textiles and Roger Milliken) while Schumer is from New York (think financial services) joint action makes perfect political sense. Revalue the yuan to benefit American manufacturers; liberalize China's financial market to the benefit of American financial service firms.
While yuan revaluation (or Schumer-Grahamism) benefits some producers, it makes the rest of us poorer. American paychecks will buy less--fewer holiday gifts (China produces many of the electronics and toys we will purchase this holiday season), fewer clothes and shoes for the kids (China produces much of the low-cost apparel and footwear we buy), and so on. And as much Chinese production dominates the low-price end of the spectrum (off-brand electronics and apparel sold in the major discount retailers at very low prices) both measures hit the poor the hardest. Yuan revaluation thus transfers income from the poor to large American companies.
I am puzzled that no one else has noticed the perversity (hypocrisy?) of this aspect of the "new populism". With one hand the new populists offer a 20 percent bump in the federal minimum wage to the benefit of a very small segment of the American workforce. With the other they strive to impose a 30 percent income reduction on all of us.
Thursday, December 14, 2006
If you read either Jeffrey Sachs' Ending Poverty or William Easterly's White Man's Burden for your book review, then you will probably want to read the other book over your break. If you read another book, then I encourage you to read both.
I find the back and forth between Sachs and Easterly particularly entertaining, if not always edifying.
Monday, December 11, 2006
Muhammad Yunus, who pioneered micro-credit in Bangladesh with the Grameen Bank, delivered his Nobel Peace Prize address in Oslo this weekend. The Nobel Prize Committee selected Yunus because "Lasting peace can not be achieved unless large population groups find ways in which to break out of poverty. Micro-credit is one such means."
Sunday, December 10, 2006
USTR Susan Schwab, summarizing the larger USTR report due on Monday in today's Financial Times, asserts that the record of China's compliance with its WTO obligations is "profoundly mixed."
While acknowledging that China has met many of its obligations, Schwab points to "regulatory obstacles," industrial policies that subsidize exports, and inconsistent enforcement of intellectual property rights as problem areas.
Scwhab concludes, the U.S. wants "a strong trade relationship with this vast and fast-growing economy. The potential benefits for Americans – in exports, jobs and greater economic competitiveness – are enormous. But that depends on China’s continued reform, and on a commitment to expand free and fair trade based on decisions by the actors in the market – not by bureaucrats."
The Full Report is now available at the USTR.
As American officials prepare for the forthcoming trip to China to discuss the US-China economic relationship, Treasury Secretary Paulson faces pressure from the new Congress to get serious about the "China Problem." As the New York Times reports, "Leaders of Congress say that the pressure on Mr. Paulson to achieve something is acute, and that it is coming from both Democrats and Republicans. Representative Nancy Pelosi, the California Democrat who is to serve as Speaker of the House next year, has already signaled a tougher line on China, raising the stakes for the Treasury chief. “Many of us in the Congress will be watching closely for tangible results from Secretary Paulson’s trip,” Ms. Pelosi said through a spokesman, asserting that the administration’s policies on China have generally been ineffective across the board."
It seems appropriate, therefore, to look at the debate about the cause of the global imbalance.
The World Bank Poverty and Growth Blog's concise overview of the most popular explanations.
The 2006 Economic Report of the President on the U.S. capital account surplus (Chapter 6).
A 2006 Treasury Department paper.
Finally, you can read Ben Bernanke's take on the global savings glut.
Thursday, December 7, 2006
Which way is trade policy heading in the new Congress? What is the likelihood that Congress will renew TPA next year? Here are some initial indicators.