Myths And Facts About China Trade and Currency Manipulation

So you want the U.S. to declare China a currency manipulator, which could lead to tariffs on goods imported from China. Won’t that spark a trade war?

The reality is that we are already in a trade war, but we aren’t fighting back. Between 2000 and 2008, 2.4 million jobs have been lost to China’s unfair trade practices, including its decision to peg its currency to the dollar, which helps make Chinese goods artificially cheap and U.S. exports to China artificially more expensive for Chinese consumers. During this period, the U.S. has tried to play nice, but that has resulted in nothing but lost jobs.

But what you’re calling for is protectionism.

China is practicing its own form of protectionism by refusing to abide by the rules it agreed to when it joined the World Trade Organization in 2001. A February 2010 survey of foreign businesses in China shows that 38 percent of them feel unwelcome doing business in China. China repeatedly refuses to play by the rules of international trade in case after case, and the United States has filed a variety of WTO cases against China’s barriers to trade as a result. However, China has filed more charges before the WTO against unfair trade practices than any other country in the world last year. What we’re asking for is for China to play by the rules and be held accountable when it doesn’t.

Plus, it’s not wrong for the United States to protect its own economic interests, and the jobs of its workers, in a way that respects the rules of global trade and the responsibilities that come with being a global economic power.

But if calling China a currency manipulator leads to a tariff on Chinese imports, that will raise the prices working families pay for thousands of basic household goods.

Actually, consumers won’t see much of a price increase at all, if any. Think back to 2005: The Senate voted to impose tariffs against China, and China responded by allowing the value of the yuan to rise by 20 percent. Back then there were warnings that consumers would be paying a lot more for Chinese imports, but in reality there wasn’t a noticeable impact on consumer goods prices. A 20 percent valuation similar to what China did in 2005 is being called for now and that would not likely have a major effect on the cost of consumer goods; to the extent that wholesale prices do rise, past history suggests retailers would absorb some of the blow themselves by accepting a lower profit margin. Plus, China setting its currency to market levels, or tariffs that would have a similar impact on import prices, would mean somewhat lower profits for Chinese companies.

Won’t a currency revaluation hurt Chinese workers?

Whatever effect this has on Chinese workers could be offset by increases in Chinese worker’s purchasing power. That’s the view of people such as Lenovo CEO Yang Yuanging, who was recently quoted in Business Week making that very point. Also, it would help reduce inflation in China caused by the price of the yuan being held artificially low.

What if China retaliates by refusing to buy our debt or selling off all of our debt?

This is a good thing. As economist Dean Baker argues “The United States has absolutely nothing to fear from China’s decision to reduce its investments in the United States and allow the dollar to fall and the yuan to rise. This decision would mean that the United States could finally get its trade deficit down to a manageable level. The trade deficit has been the leading imbalance in the U.S. economy over the last decade.” Clearly, NOT doing anything would only make the problem worse.

Wouldn’t China selling off our debt destroy our economy and ability to borrow as a nation?

China selling off its debt would hurt China’s economy even worse since they have invested so heavily in the U.S. China has $1.5 trillion in U.S. assets and there is simply no one that would to buy them. China would be forced to take a huge loss on these assets. So it’s unlikely they would do anything that would negatively affect their own economy.

Won’t pushing China on currency make it more difficult to address our own budget deficit?

The opposite is true. Producing more products in the United States would mean more Americans working and paying taxes instead of collecting unemployment, thus helping us to reduce our budget deficit. It would mean we are earning money instead of borrowing to buy things, leading to a more stable economy.