The yuan and the U.S. trade deficit

Time to revive this thread!



China Currency Measure Is A Desperate Mistake
Dan Ikenson Dan Ikenson, Contributor


The good news for those craving harmony in Washington is that that mythical elixir called bipartisanship has been spotted in Congress. The bad news is that it is finding its expression in an outbreak of self-destructive China-bashing.

After eight years of threatening punitive action to compel appreciation of the Chinese currency at a pace deemed acceptable by U.S. politicians (a period, by the way, in which the Yuan appreciated by 30% against the dollar in nominal terms—and by much more in real terms), lawmakers may just pull the trigger this time. If so, their action should be seen for what it is: a vote of no confidence in themselves as a body capable of producing solutions to the nation’s economic stagnation and monumental budget and debt woes.

China currency legislation is a diversion – a shell game. Despite the opinions of Harold Meyerson and Fred Bergsten, there simply isn’t any evidence that a stronger Yuan will produce a smaller bilateral trade deficit or that a smaller trade deficit will boost employment. Indeed, policymakers shouldn’t be targeting trade deficit reduction in the first place—let alone a bilateral trade deficit, which is meaningless in a world dominated by trade in intermediate goods.

As explained here and here, globalization with it transnational production sharing and cross-border investment has mitigated the impact of currency values on trade flows. Because the value of imported inputs accounts for about half of the value of Chinese exports, a stronger Yuan reduces the prices of imported inputs used to manufacture and assemble products in China for export to the United States and elsewhere. This dampens any expected impact of a rising currency. In fact, between July 2005 and July 2008 the renminbi rose 21% against the dollar, to $.1464 from $.1208, where it had been pegged since 1997. But the U.S. bilateral trade deficit increased from $202 billion to $268 billion over that period. Since June 2010, the Yuan has appreciated by 7 percent against the dollar, but the bilateral trade deficit is on target to be 34% larger in 2011 than it was last year. And (as described here and here) there is no discernible relationship between trade deficits and employment.

Broader support on Capitol Hill for currency legislation boils down to this: with public approval ratings hovering in the low-to-mid teens, an embattled Congress is looking for plausible scapegoats for the dismal state of U.S. economic affairs. Thanks to a lot of media-driven hype about China’s inexorable rise at U.S. expense, Americans fear China almost as much as they loathe Congress. A vote to reclaim American jobs stolen by China—as the currency legislation is so disingenuously characterized by some of its supporters—enables politicians to return to their states and districts with concrete evidence of the seriousness of their efforts.

Only it’s not serious. It’s deeply dismaying. Instead of working hard to change homegrown U.S. policies that inhibit investment, job creation, and growth, our elected officials would choose to lay the blame for our woes at China’s feet, then cross their fingers and hope that their provocative, unilateralist legislation doesn’t unleash a torrent of adverse consequences that would make economic matters even worse. Can there be a stronger admission of failure than to launch such a desperate Hail Mary?

US is heading towards a very dangerous and slippery slope. If somehow this bill passes both houses and lands on Obama's desk, and he doesn't veto it for political reasons, we are looking at a very real possibility of a trade war. Which the US is most certain to come off worst...

When will those ignorant politicians learn that manufacturing jobs are never going back to the US?!



Senators court 2012 voters with China currency bill

(Reuters) - For lawmakers eyeing their re-election prospects next year, this week provides a chance to show they mean business about cracking down on China's currency practices and returning jobs to America.

Critics say the legislation that looks set to pass Senate this week is more likely to help a factory worker in Hanoi than in Ohio, and could expose the United States to a damaging trade row with its fastest-growing export market.

But those arguments don't wash with Senator Sherrod Brown, a Democrat from the manufacturing heartland of Ohio.

He recounts U.S. warnings to China going back to the 1990s, when Congress fought annually over trade relations.

"That was back when our trade defict with China was $10 billion. Now it's $200 billion plus. This will help to level the playing field. China gaming the currency system has clearly undercut our ability to compete in many things," Brown said.

"We have not been aggressive enough with China. I think it's cost a lot of people a middle-class standard of living in my state. It's caused too many teachers and firefighters and police officers to be laid off, when plants are closed and there's no money to pay them," Brown said.

Jobs are such a hot topic in early 2012 campaigning that prospects for the China currency bill to pass Congress could be stronger than in previous years, potentially putting President Barack Obama on the spot over whether to veto it.

Obama carried Ohio, a union-heavy state where concerns about trade resonate, in the 2008 election after it went for Republican George W. Bush in the two previous contests.

Republican presidential candidate Mitt Romney put China centerstage of the campaign this month when he promised he would "clamp down on China when they cheat."

SMALL BILL, BIG STAKES

The legislation probably would raise duties on only a small portion of imports from China, which totaled about $365 billion last year, far more than from any other supplier.

The Congressional Budget Office estimated a similar bill passed last year by the House, but not the Senate, would collect only about $125 million in duties over 10 years based on expectations that few goods would qualify for the relief.

But every attempt by U.S. lawmakers to hit China for its trade practices is hugely sensitive for Beijing.

"The race for the U.S. presidential election has heightened, and the yuan exchange rate is now a target again," official news agency Xinhua said in a commentary on Sunday.

It slammed the claims of the bill's supporters as "expedient and shallow.

Many in the United States agree.

"It is very easy to say that China is the bogeyman," said Doug Guthrie, dean of business at George Washington University. He said the bill would do little to help U.S. jobs and would raise U.S. import costs, but said it might yet pass.

"The sad thing is that even though Obama gets that, he is afraid of these political people" in the White House who might recommend he sign it to win votes, said Guthrie.

The Senate legislation is expected to clear its first hurdle, a procedural vote, late on Monday, setting the stage for as much as a week of debate on the measure.

"I believe once it passes the Senate it's going to be hard for the House to block it so I am optimistic this bill can reach the president's desk," said Sen. Charles Schumer, a long-standing critic of China, told reporters on Friday.

If the bill passed the Democrat-controlled Senate, it then goes to the House of Representatives which is run by the Republicans. They are traditionally less supportive of measures to crack down on trade. But that may be changing.

Last year, 99 Republicans voted for similar legislation. This year, supporters already have more than 200 co-sponsors for the bill and expect this week to reach 218, the amount needed for approval if House Speaker John Boehner and Majority Leader Eric Cantor allow a vote.

Boehner's office has declined to say if Republicans, under pressure to drop their opposition to the bill, could change their mind and bring it to the floor.

JOBS BILL FOR VIETNAM

At the heart of the legislation is a claim that China's currency is deliberately undervalued, giving Chinese companies an unfair price advantage in international trade.

John Frisbie, president of the U.S.-China Business Council, which represents American companies that do business in China and have the most to lose from increased friction on the trade front, concedes China's currency is probably undervalued. But he notes that it has risen about 30 percent since 2005.

In that time period, the United States has continued to lose manufacturing jobs, raising the question of whether a strong revaluing of the yuan would help save U.S. jobs.

The Senate bill is the wrong approach because most of the goods the United States imports from China are no longer made by U.S. industry, Frisbie said.

Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics, is also skeptical.

"I've always been of the view that, if the Chinese currency were to appreciate, we're not going to get those jobs back in the U.S. They will migrate to Indonesia or Vietnam or Bangladesh perhaps Sub-Saharan African -- the lowest next lowest cost place," Lardy said.

One big risk for the United States is a potential challenge to any legislation at the World Trade Organization which experts say Beijing might win, giving China the right to impose retalliatory measures. Many businesses fear China would find a way to get back at the United States even before then.

Obama has not taken a formal position on the bill, prompting one Senate Republican last week to call on the administration to clearly state its views before the Senate begins debate on the legislation this week.

Meanwhile, Brown said he is convinced the House will be forced to act after the Senate vote.

"I know there are lot of freshmen Republicans elected last year that campaigned on 'stand up to China' and this is their best opportunity to show it," Brown sai

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