Don’t confuse China with its neighbors

Marketplace Staff Jun 7, 2007
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Don’t confuse China with its neighbors

Marketplace Staff Jun 7, 2007
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Kai Ryssdal: The interest rate action the past few days has been good news for the beleaguered American dollar. The greenback’s gotten stronger this week as rising yields in the U.S. bond market make this a more attractive place to park some extra cash.

One currency that’s held it’s own, though, against the dollar is the Chinese. Mostly because Beijing keeps the yuan in a narrowly-fixed trading range.

Treasury Secretary Henry Paulson’s been warning the Chinese about that. The House and Senate are talking about bringing protectionist legislation to a vote against China and some other Asian countries. But commentator Adam Posen says lawmakers shouldn’t lump those others in with China.


Adam Posen: No question, China is manipulating the value of its currency. The Chinese government does that by buying hundreds of billions of dollars a year. That helps keep the dollar strong. And then China prints and sells however much of its own currency that it takes to keep the yuan undervalued against the dollar.

Cheap goods from China are nice for U.S. consumers. But Congress thinks China is cheating U.S. exporters out of fair competition and keeping Chinese wages artificially low. That means they can’t afford our products.

So lawmakers are about to threaten trade retaliation. But not just against China — they’re including other countries like Japan, Malaysia, Taiwan and possibly even India.

They’re feeling the heat from Detroit’s Big Three. Automakers and a couple other industries want to piggyback protection from Japanese competition onto concerns about Chinese manipulation.

Congress may include any currency arbitrarily determined to be weak against the dollar — even when financial markets set those exchange rates without any government manipulation. It’s true that some Asian countries run bilateral trade surpluses with the U.S. But they aren’t manipulating their currencies, and they aren’t actively cheating like China is. They’re not harming our economy, either.

Legislation that would include these other countries is a big mistake. It opens up the U.S. to counterattack from any country where the dollar is weak against its currency. That includes Europe, where countries could slap high duties on our exports, or block their markets. And targeting other Asian economies beyond China would indicate that we set our currency policy on the basis of particular industries’ pursuit of bailouts.

Countries and investors would dump the dollar. That kind of dollar crash would fuel inflation at home, force the Fed to raise rates, and would drive up average borrowing costs. That would hurt every American.

Ryssdal: Adam Posen is a Senior Fellow at the Peterson Institute for International Economics in Washington, D.C.

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