China Currency Bill: The Upside Posted by Jacob Stokes

Yesterday, the House passed a bill that allows the U.S. to seek trade sanctions against China and other nations for manipulating their currency to gain trade advantages. The bill aims at punishing China for keeping its currency an estimated 40 percent lower than it should be, which the Economic Policy Institute estimates has cost the U.S. 1.8 million jobs since 2001.

Of course, there’s some amount of political motivation that goes into this decision, as candidates turn to lambasting China on the campaign trail. And there are certainly things that can be done at home that would help the situation, as Matt Yglesias points out.

But I think the measure has a few redeeming qualities. First, while the bill is unlikely to pass, it will give some ammunition to the Obama administration when it goes to China and tries to play good cop (administration), bad cop (Congress) with the Chinese, giving credibility to threats about actions America is prepared to take on the issue. This is important because a central characteristic of the Chinese regime is that they’re much more concerned about force and coercion than they are about being the sparkle in the eye of the international community.

Secondly, as America begins to push back on the issue, the Chinese government can use that pressure as a convenient excuse to push back against their own influential export lobby, which is the biggest proponent of keeping the value of the yuan low. Chinese leaders know they need to expand the domestic market and help the Chinese consumer buy more; increasing the value of the yuan will do that. What’s more, the amount of currency intervention needed to keep the yuan low creates all sorts of negative sides effects, an overheating economy being only one of them, that the Chinese government would like to get rid of.

Finally, it’s important to address concerns about possible effects of this legislation, especially the concern that the move will spark a trade war. But as the Wall Street Journal’s China Real Time blog points out, the legislation would likely get struck down by the WTO before it could create a trade spat. And even it didn’t, China and the U.S. have too much at stake, their economies are too interconnected, for it to make sense for them to retaliate by engaging in an all-out trade war. The WSJ blogs quotes Li-Gang Liu, China economist for Australia & New Zealand Banking Group, who puts the trade war scenario in context: “A trade war scenario at this stage is unlikely to materialize.”

In other words, even if the bill doesn’t become law, it can give ammunition to the Obama administration to press the Chinese regime, which they can then use against the export lobby, to help change the policy – a move that’d be beneficial to both countries. Both America and China know they need to rebalance the global economy. This is a first step, albeit an ugly one, towards mustering the political will to do that.

 

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