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LISTEN: Dave Johnson on the Rick Smith Show talks about China’s currency manipulation.

The Treasury Department released its “Semi-Annual Report to Congress on International Economic and Exchange Rate Policies” this week, and went to great lengths to find a way not to label China as a currency manipulator.

The U.S. Treasury Department is supposed to keep an eye on currency manipulation and report twice a year on whether countries are engaged in this practice so that we can protect our economy (our jobs, factories, ability to make a living and ability to defend our country) from the damage it can cause. If this report finds that countries are engaged in currency manipulation, the law then requires the government to place tariffs on goods from those countries, along with other measures to get them to stop.

A McClatchy report, “Treasury scolds China anew, doesn’t call it a currency manipulator,” explains:

The Treasury Department on Tuesday stopped short of declaring China a currency manipulator but raised concern anew about the need for the Asian powerhouse to let markets play a greater role in determining the value of its currency.

… “During 2014, however, the exchange rate has reversed direction, depreciating by a marked 2.68 percent year to date,” the report released Tuesday said. “There are a number of continuing signs that the exchange rate adjustment process remains incomplete and the currency has further to appreciate before reaching its equilibrium value (against the dollar).”

Treasury officials urged Japan and Korea to rely less on exports to the United States and foster greater domestic demand for products made at home. One way to do that is to let these currencies appreciate against the dollar, the report said.

Despite the frictions, however, the Treasury Department stopped short of accusing any of the Asian partners of manipulating their currencies for home-field advantage.

In spite of all of this, in the end Treasury declined to officially label China as a manipulator, thereby avoiding the legal requirement to do something about it.

“Based on the analysis in this report, Treasury has concluded that no major trading partner of the United States met the standard of manipulating the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade,” the report concluded.

Currency Manipulation Costs Us 5.8 Million Jobs

In February the Economic Policy Institute (EPI) released a report on the effect of currency manipulation, titled “Stop Currency Manipulation and Create Millions of Jobs.” According to the EPI report currency manipulation by China and others is costing the United States between 2.3 million to 5.8 million jobs.

According to the report, realigning exchange rates could:

  • Reduce U.S. trade deficits by up to $500 billion per year by 2015;
  • Increase U.S. GDP by up to $720 billion per year (a 4.9 percent increase);
  • Support creation of up to 5.8 million jobs (a 4.1 percent increase); and,
  • Increase manufacturing jobs by up to 2,337,300 jobs (a 15.9 percent increase).

Also, increased tax revenues and reduced safety net expenditures would reduce the 2015 federal budget deficit by up to $266 billion, up to an 86.1 percent decline in the projected federal deficit.

From the EPI report:

Reducing trade deficits by eliminating currency manipulation would cost the federal government nothing; in fact, increased tax revenues and reduced safety net expenditures would reduce federal budget deficits by between $107 billion and $266 billion in 2015 (34.4 percent to 86.1 percent), and net state and local resources would increase by between $40 billion and $101 billion.

The U.S. goods trade deficit with China reached a record high of $318 billion in 2013.

Alliance for American Manufacturing (AAM) President Scott Paul said of the Treasury decision:

“Today’s Treasury report marks the eleventh consecutive pass for China on its currency manipulation. That’s not a surprise. But it is surprising that the decision comes in the wake of China’s moves to both devalue the yuan in the short term and dramatically slow its appreciation over the past year.

“While candidate Obama mocked the Bush administration approach on China’s currency policy, the yuan’s rise has actually slowed considerably since 2010 when compared with 2005 to 2008, its last period of valuation. And our trade deficit with China is far higher now than it ever was during the Bush years.

“I am not suggesting President Bush deserves credit for a slower rate of appreciation. But I am saying that President Obama’s approach to this ongoing problem has been completely inadequate, and that it has cost American jobs.

“It’s disappointing, too, that Congress has done nothing to respond to China’s cheating on currency, this year or last. But in the absence of congressional action, the president, with his ‘pen and phone’ tools, could do a lot. And he hasn’t. Ending currency manipulation could create millions of jobs in the U.S., but the Administration struck out today when given the chance to help America’s workers.”

China’s Help With North Korea

One reason said to be behind the administration’s reluctance to confront China is the need to keep on China’s good side (i.e. let them get away with the things they are doing to destabilize the world’s economy) in order to get China’s help dealing with North Korea.

Just in time for this report North Korea began acting up. From Reuters (“U.S., China in ‘productive’ talks after North Korea test threat”):

The United States and China have held “productive” talks on North Korea, the U.S. State Department said on Tuesday, part of stepped up international diplomacy after Pyongyang warned of plans to conduct a new type of nuclear test.

… Pyongyang made the test threat after the United Nations Security Council condemned North Korea’s firing of two medium-range Rodong ballistic missiles into the sea on March 26.

It was North Korea’s first firing in four years of mid-range missiles that can hit Japan and followed a series of short-range rocket launches over the past two months.

Last June I wrote about the problem of creating an incentive for China to get North Korea to act up when we’re pressuring them to do something about their currency manipulation:

It is assumed that the administration gives a priority to national security over trade, allowing China to slide on the currency manipulation in exchange for help with “tensions” in areas like dealing with North Korea, for example. But this also creates an incentive for China to create these tensions to deflect from their trade violations. There appears now to be a routine where we have “tensions” with, for example, North Korea just as issues of trade are coming to the forefront, and those tensions disappear as soon as the currency manipulation complaints or other trade issues are drop

A few days later on a conference call I asked Clyde Prestowitz of the Economic Strategy Institute about this:

I asked a question about how it is said that the U.S. won’t declare China to be a currency manipulator because we want their cooperation to help reduce regional tensions, such as with North Korea. If we hold back on confronting China over their trade violations in exchange for China’s help with tensions such as North Korea, doesn’t this create an incentive for China to create those very tensions?

Prestowitz said he doesn’t think China got North Korea to threaten to nuke South Korea – and us – as a way to get us to lay off on currency, hacking and other issues.

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