Last week, the U.S. Treasury (once again) declined to label China a “currency manipulator.” The decision was followed by the usual refrain about the U.S. taking a soft line on China, to the detriment of U.S. manufacturing. To some, it is inexplicable that the U.S. does not more directly confront China on the issue. This is especially so in light of the substantial support in Congress for currency-related legislation. See, for example, the fairly recent Currency Exchange Rate Oversight Reform Act (CERORA). The Act sought to provide a number of avenues through which the U.S. could punish China if the yuan did not substantially appreciate against the dollar. This high-profile piece of currency legislation was passed (only in the Senate) in 2011.
Did the bill pit senators who represent manufacturing interests against all others? Not really. As the plot below indicates, senators from states with higher levels of manufacturing production as a share of state GDP were actually less likely to vote for the bill, on average.
Work by a number of political economists provides an explanation as to why might this be the case.* Simply put, the exchange rate preferences of manufacturers are not homogenous. Broad labels like “manufacturing” and “tradables”cover a lot of ground. Thomas has work showing that internationally competitive manufacturing firms are often not vulnerable to exchange rate based influences on competitiveness (Oatley 2010). Others have done (or are doing) research on the various firm/industry-level factors that determine how sensitive businesses are to appreciation and depreciation. For example, Broz and Werfel (2012) find that the extent of exchange-rate pass-through in an industry, as well as industry reliance on imported intermediate inputs, have an impact on their vulnerability to exchange rates.
These factors might go great lengths in explaining the apparent negative relationship between tradables production at the state level and senators’support for CERORA. (It is also worth noting that in a simple statistical model, state-level manufacturing production had a negative and statistically significant relationship with senators’ support for the legislation – even when controlling for other factors such as party, state unionization rates, unemployment, etc. More on this to come.)In short, exchange rate preferences are a lot more complex than popular portrayals suggest. The political wrangling on the CERORA bears this out. The voices that diverged from the hardline “undervalued yuan = unemployment = America’s immediate decline” story were not insignificant ones. Speaker John Boehner vocally opposed the law. David Camp, chairman of the Ways and Means Committee, indicated that a currency bill was not a priority for 2011. And, President Obama suggested that the bill was not the best way to handle dollar-yuan misalignment. As it turns out, these individuals have a fairly significant role to play in determining the fate of any currency realignment legislation.*
*Oatley, Thomas. 2010. “Real Exchange Rates and Trade Protectionism.”
Business and Politics 12 (2): 1-17.
*In fact, because of this clear opposition at the tippy-top, the Senate's vote on this legislation was often considered to be "symbolic."