The House's bill against foreign currency manipulation
Dollars and yuan notes.
TEXT OF INTERVIEW
Kai Ryssdal: The House took a detour into the foreign exchange markets today with a bill that would slap stiff import duties on countries that are found to be manipulating their currency. There are 200-some-odd countries in the world. But the bill is only really geared toward one of them. China and the political perception in Washington that Beijing is keeping its currency artificially low to boost its own exports.
Eswar Prasad teaches trade policy Cornell University. Welcome to the program.
Eswar Prasad:My pleasure.
RYSSDAL: The basic idea behind this House bill that's under consideration today is that if we can somehow convince the Chinese to let their currency float, it will be better for the American economy -- we'll have more jobs, stronger exports. Are you buying that?
PRASAD: It will certainly help the U.S. economy if the Chinese allowed the currency to appreciate. Because if their currency did float up, a lot of other currencies would probably float up along with that because other countries are terrified about losing competitiveness to China. So they would let their currencies appreciate. So on net it would help the U.S., but ultimately, I don't think it's going to solve the fundamental problems the U.S. economy faces.
RYSSDAL: You bring up the point, actually, that this is a global currency marker. The Japanese have been intervening to lower the value of the yen; the Brazilians are upset about the high value of their currency. Nothing happens without something happening some place else.
PRASAD: That's exactly right. And in fact, the Chinese have been making the argument now that the U.S. is maintaining absurdly low interest rates for its own purposes, so they say, "Why point fingers at us?" But the reality is that China is going to have to be part of the solution if we want to fix global microeconomoic inbalances. There are big structural problems in the Chinese economy and big structural problems in the U.S. and other economies. But this is certainly one part of the solution.
RYSSDAL: Is this something, though, that could turn into what is often called a trade war? Where people are doing things -- countries are doing things -- specifically to help themselves and hurt other people?
PRASAD: Ultimately, every country does want to do well in terms of exports, and the issue is where countries cross the line by giving their companies unfair advantages. So ultimately, the question is whether we can come up with a set of rules that everybody's going to play by. And there is a sense that the Chinese are not playing by the rules. But their point of view is that the rules are already stacked against them; that if they did allow the currency to appreciate, it would actually increase the purchasing power of the households and accomplish what they actually want to accomplish, which is to raise consumption levels in their economy, which are very low right now.
RYSSDAL: For all that we are talking about currency now in this country, and we have been for a number of months -- at least in Congress -- is this all going to go away after the election? Does politics explain the popularity?
PRASAD: Right now in the U.S., there is a very combustible mix not only of leading up to election season and we have very vulnerable Congressmen. But in addition to that, the jobs picture is very weak, the trade deficit in the U.S. is beginning to rise again -- and China counts for about half of that so far this year. So it is a volatile mix and that I think is what is being reflected in what is typically overheated rhetoric now getting translated into more substantive actions directed at China.
RYSSDAL: So what happens then -- once the election is done and rhetoric calms down, does anything fundamentally change?
PRASAD: If the jobs picture does not improve and if the trade deficit continues to increase, then I think the pressure will remain on China. Now the reality is that China feels that it has the upper hand in this relationship. Whatever the reality, they feel that they are financing the U.S. budget deficit and sending a lot of cheap goods to the U.S., so the U.S. should be beholden to them. And that narrative has really taken hold in Chinese political circles and is driving their reaction. So what I think we are likely to see, if this legislation does move forward in some form, is two types of reactions by China: One is some sort of explicit trade sanctions, but also measures that could limit access of U.S. firms and financial institutions to China's markets.
RYSSDAL: Eswar Prasad is a professor of trade policy at Cornell University. He's a senior fellow at the Brookings Institution as well. Professor, thanks so much for speaking with us.
PRASAD: Thank you very much, Kai. Pleasure being on your show.