The most recent US Treasury Department’s review of foreign trading partner’s exchange rate policies revealed that China is manipulating the value of its currency to boost its global competitiveness. A careful analysis of all evidence on this issue clearly indicates that China has surpassed all well-established limits which have been previously used to establish currency manipulation.
China has been pushing its Yuan up considerably day by day to counter its market liberalization policy (Autry and Navaro 2), and this is hurting the US economy and manufacturing companies operating in the US.
I therefore send you my request asking you to influence the government to come up with policy that can better deal with China’s currency manipulation and help improve competitiveness of goods manufactured in the US in the Chinese and international market as well as the US economy, without creating trade war between the US and China.
What actually happens?
China adopts a “sterilization process” which enables it keep its Yuan trading within a designated range (Autry and Navaro 5). This involves emptying large amounts of US dollars out of their ever rising trade surplus. They then ensure that these dollars are not later sold in the foreign exchange markets so as to increase the relative price of the US dollar making US goods less competitive in the Chinese as well as global markets.
China buys US Treasuries to allow it make the greenbacks “go away” and currently holds the largest stake in the US treasury securities accounting for about 25% of its total foreign holdings (Autury and Navaro 5). Autry and Navaro state that China’s funding of the US debts has made American stimulus addicts quiet and even provide them with important information against the US (Autry & Navaro 6).
Currency manipulation standards
Usually, there are several factors as regards currency manipulation and bilateral trade which can be analysed to determine whether a country is manipulating its currency value or not against the dollar to achieve unfair competitive advantage, as well as, whether this harms the US or not.
The first one is to determine whether the country has a high as well as an increasing bilateral trade surplus with the US. The US government measured the bilateral US-China surplus in 2005 and found it to be at $203 billion (Bivens & Scott 4).
It was also established that the bilateral surplus had risen by $119 billion between 2000 and 2005 and that this represented more than 9% of China’s entire GDP. Nine cases regarding damaging currency manipulation were investigated; in seven out of them, it was found that “the US bilateral trade deficit was lower than 9%” (Bivens & Scott 4).
The first China’s currency manipulation was realized in May 1992 but by then, its surplus with the US was just 3.4% of its GDP (Bivens & Scott 4). This is a clear indication of China’s increasing bilateral trade surplus with the US.
The second is whether “the country’s global current account surplus is high and increasing” meaning that its trade as well as income flows have to be measured (Bivens & Scott 3). It was also found that China’s global current account surplus by 2005 was more than 7% of its GDP, an increase of 5% within five years.
Its global current account surplus by 2005 exceeded “levels reached in four of the nine cases” measured (Bivens & Scott 5). Besides, there is evidence indicating that China’s own trade data could have to a large extent undervalued its global trade as well as current account surpluses.
In 2003, the China Currency Coalition used data on Chinese exports as well as imports from China’s forty trading partners to calculate approximately “the country’s total trade surplus at $203 billion”; however, this was 341% more than what the government had officially reported as the country’s trade surplus (Bivens & Scott 5). China had only officially reported $46 billion as its trade surplus.
The third is whether the country has a high as well as increasing “accumulation of international reserves” (Bivens and Scott 3). In 2005, China’s international reserves rose by about 207 billion to the end the year at $821 billion (Bivens and Scott 6).
It is estimated that about 70% of these international reserves were dollar reserves and this has continued to increase over time. China’s reserves purchase “in the form of dollar-dominated assets” has contributed to the rise in the value of the dollar, thus, preventing its Yuan from gaining value (Bivens & Scott 7). This means that Chinese reserve purchases serves as actual “subsidy for Chinese exports into the US market” (Bivens & Scott 7).
Impact of China’s currency manipulation on the US
Bivens and Scott (2) state that China’s currency manipulation is particularly challenging considering the unprecedented size as well as growing trade imbalances between China and the US. The bilateral deficit between the US and China is to blame for approximately a quarter of the whole of the US trade deficits that has continued to rise. Bivens and Scott (2) state that it is widely agreed that “the US trade deficit is unsustainable”.
Besides, the process of unwinding it could further hurt the US as well as its key trading partners. Of the greatest concern about this issue is that the more this deficit is allowed to grow, the more hurting this adjustment will be. The currency manipulation policy adopted by China remains a major barrier to reducing the US deficit now and this could be worse when the cost will go higher.
Damage to particular US market sectors
China’s currency manipulation has fuelled the growth of the US trade deficit, and this has relocated jobs in the US tradable-goods sector, which are largely manufacturing jobs. Between 1997 and 2005 alone, “the ratio of domestic production to domestic consumption in the US manufactured goods dropped from 92% to 78.2” (Bivens & Scott 10).
The contribution of the Chinese manufacturing imports to this decline was more than 36%. Scott (8) reports that between 1997 and 2003, the increasing China/US trade deficits fuelled by China’s currency manipulation policies resulted to lose of 869,000 jobs in the US tradable-goods sector.
Impact on other US trading partners
Chinese currency manipulation policies continue to affect more than the US-China bilateral trade. Between 2002 and 2005 alone, it caused the dollar “to depreciate by about 36% against the euro”, and since the Chinese currency is tied firmly to the dollar, it has continued to cause the dollar to depreciate as well (Bivens & Scott 7).
Furthermore the margin between Chinese exports and the US exports to the European Union have continued to widen, thus, affecting the trade relationship between the US and the EU as well as other countries. Similarly, China’s currency manipulation policies is robbing the global market of developing nations. T
hese policies have forced some developing nations to manage their exchange rates in a way that enables them match China’s competitive position (Bivens & Scott 8), and this hurts manufacturing companies in US which export their products to these countries.
Although many developing countries desire a more flexible currency, they are not willing to be priced out of the competitiveness that exists in the US market by China’s currency manipulation policies.
The current Currency Bill
It is encouraging that the US lawmakers have found it important to craft a bill that would ensure that China’s currency manipulation policies are dealt with by passing the Currency Exchange Rate Oversight Reform Act. However, according to Bingham, the current provisions in this Act could sparkle an unhealthy economic war between the US and China (Bingham 4).
Although the proponents of this legislation believe that it will force China to raise the value of its Yuan thereby improving the competitiveness of the US goods in the market (Lott 4), opponents believe that this could inspire China to hit back “by imposing duties on US imports or slowing the appreciation of its currency” (Bingham 11).
This means that it would be more reasonable to craft a bill that would be consistent with the US international treaties as well as obligations and force China to raise its currency value while avoiding trade war.
It is clear that China applies currency manipulation having established that its practices have surpassed all the standards for currency manipulation. China’s currency manipulation greatly affects the bilateral trade between the US and China as well as its key trading partners, and in particular, those of us who own or are shareholders of corporations in America.
It hurts the US’s tradable-goods sector and its ability to create jobs for its citizens. The US senate has done an incredible job by passing the Currency Exchange Rate Oversight Reform Act.
What now remains is; you, Mr. President, to sponsor a bill that would modify the Act to make it practical and acceptable, and sign it so that your administration can enforce the provisions that would effectively deal with China’s currency manipulation policies as well as trade abuses.
This policy package would pay dividends to the US, especially manufacturing companies in the US, the EU and other trading partners and developing countries.
Autry, Greg and Navaro, Peter. Think Different about Chinese Currency Manipulation. Huffington Post, 17 November 2011. Web.
The authors present radical proposals on how the US government should deal with China’s currency manipulation. They argue that China’s currency manipulation tramples on the US economy and sovereignty as it undermines the US’s ability to create jobs to its population.
However, few rich US citizens who own multinational corporations in China, and American stimulus addicts, have often supported China’s course and that is why the Currency Exchange Rate Oversight Reform Act can neither be signed into law nor be implemented by the government administration.
They therefore propose that the only way of dealing with China’s “sterilization system” is to shut off China’s access to the US currency disposal site by enacting special legislation to allow Treasury to reject bids on new US bonds from China.
Bingham, Amy. Will Currency Manipulation Bill Ignite Trade War with China. abc News, 11 October 2011. Web.
The author reports on the controversies surrounding the recently passed Currency Exchange Rate Oversight Reform Act by the US senate. The article presents views of politicians, including the president, and economic analysts on the effectiveness of the bill in dealing with China’s currency manipulation without creating trade war between the US and China.
It argues that although the bill would allow the Treasury Department to impose tariffs on Chinese imports so as to compensate for the deflated prices, it could motivate China to retaliate by doing the same to US imports or slow the appreciation of its Yuan. Thus, it would be important to enact a bill that is feasible and would better solve the problem without creating trade war.
Bivens, Josh and Scott, Robert. China manipulates its Currency: A response is needed. Economic Policy Institute, 25 September 2006. Web.
Bivens and Scott, both from the Economic Policy Institute, present important data proving why it is necessary for the US government to put in place measures that will force China to revaluate its currency.
It uses data from credible sources such as US International Trade Commission and the International Financial Statistics Database of the International Monetary Fund, Bureau of Economic Analysis, and the European Commission to prove that it is true that China manipulates its currency, the extent of the impact on the US economy and that of its trading partners.
The authors argue that China’s currency manipulation is the major impediment to achieving global trade balance.
Lott, John. The China Currency Bill will Make Americans Poorer, Not Richer. Fox News.com, 06 October 2011. Web.
The article presents a view opposing the enforcement of the Currency Exchange Rate Oversight Reform Act to force China to increase the value of its currency relative to the US currency. He agrees that China’s currency manipulation is a mistake and is hurting the US economy: however, enforcing the Act could plunge the US into another depression similar to the Great Depression which occurred in 1930s.
He argues that enforcing this legislation as it is would only help reduce a small fraction of the problem while China could also retaliate by imposing higher tariffs on US imports forcing Americans to pay higher prices and further increase unemployment. As such, the bill should be reviewed as it will only make Americans poorer if enforced as it is.
Scott, Robert. “U.S.-China Trade, 1989-2003: Impact on Jobs and Industries, Nationally and State-by-State.” EPI Working Paper #270. Economic Policy Institute, 11 January 2005 Web.
The author presents the bilateral trade relationship between the US and China and its impacts on the US economy especially on employment across several economic sectors. The research report traces the impact of China’s currency manipulation on US jobs in the tradable-goods sector from 1989 to 2003.
It provides statistical evidence, which includes graphs and tables, to prove the impact of China’s currency manipulation policies on the US economy.
The author argues that in this period alone, the growing trade deficits caused by China’s currency manipulation cost the US more than 1.5 million jobs in the tradable-goods sector mainly in the production, and other sectors such as construction, retail trade, supplying and services sector.