China Currency Surprise Lucy Pulled The Football

Dave Johnson

Charlie Brown (us) has again run up to kick the football. Lucy (China) has again pulled the football away at the last minute. The result? The trade gap continues to grow and tis eats away at our jobs and our GDP: “…the worsening trade deficit cut the Q2 GDP growth rate by -2.8%.”

This time it’s currency again. By holding their currency under market value China gains a pricing advantage in world markets — goods made there have as much as a 40% pricing advantage even before factoring in various other trade advantages China is creating. After the battle earlier this year to get China to stop manipulating its currency China agreed to let the value of their currency rise. But it has not risen.

Paul Krugman writes about this in China, Japan, America,

Time and again, U.S. officials have announced progress on the currency issue; each time, it turns out that they’ve been had. Back in June, Timothy Geithner, the Treasury secretary, praised China’s announcement that it would move to a more flexible exchange rate. Since then, the renminbi has risen a grand total of 1, that’s right, 1 percent against the dollar — with much of the rise taking place in just the past few days, ahead of planned Congressional hearings on the currency issue. And since the dollar has fallen against other major currencies, China’s artificial cost advantage has actually increased.

Clearly, nothing will happen until or unless the United States shows that it’s willing to do what it normally does when another country subsidizes its exports: impose a temporary tariff that offsets the subsidy. [emphasis added]

Over the weekend Treasury Secretary Geithner agreed that China has done almost noting to let its currency rise. WSJ: China Has Done “Very, Very Little” on Exchange Rate: Geithner,

“China took the very important step in June of signaling that they’re going to let the exchange rate start to reflect market forces. But they’ve done very, very little, they’ve let it move very, very little in the interim,”

This week the Congress is holding hearings in this issue,

Geithner will testify Thursday on the Treasury report before the Senate Banking Committee at 10 a.m. and then again at 2 p.m. before the House Ways and Means Committee. The Ways and Means panel will also hold a Wednesday hearing on China currency issues but has not yet released a list of witnesses.

Who could be against China’s currency rate increasing? Caterpillar Lobbying to Block U.S. Measure on China’s Currency,

A trade group for businesses with investments in China, such as Caterpillar Inc., is lobbying to fend off U.S. legislation aimed at forcing the Chinese to raise the value of their currency.

… The China council, joined by the U.S. Chamber of Commerce and representatives of farm groups, is seeking to head off the House legislation as the committee prepares for a hearing on Sept. 15. Treasury Secretary Timothy F. Geithner is scheduled to testify on China’s currency the next day.

There are fears about financing our bonds, but there are also fears that China will retaliate and push American businesses out of their markets. China has a vast and growing market because their mercantilist policies are working – for them. So they are taking over the lead in world manufacturing. American businesses want to sell to the resulting market, and fear China won’t let them if we play tough and demand fair trade. But American manufacturing is how America makes its living, and we need to address these imbalances to restore our economy.

Congress needs to take up this issue, because China is not feeling sufficient pressure to take this seriously. The administration has not started the necessary process to impose tariffs, Congress needs to legislate.

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