Political Rhetoric and Economic Policy: Should We Label China a Currency Manipulator?

Monday night’s presidential debate on foreign policy certainly gives voters some kernels of thought to chew on, and plenty of abstractions to lay their head down on at night. Among all the puns, one-liners and rhetoric was a comment from Governor Romney that caught my attention, “I will do what this administration should have done and label China a currency manipulator.” Even as I heard my ultra-conservative grandfather let out a war-whoop in support of Governor Romney and watched snarky tweets from my very liberal friends come through over the chatter I found myself thinking, “What exactly does that mean?”

It isn’t the first time the thought crossed my mind. After all, I recall President Obama promising to use all diplomatic means necessary against China, including this label, in 2008. I heard the same promise from President George W. Bush’s mouth in 2000 and 2004.  In fact, this very popular campaign promise from both sides of the aisle has always been one that caught my attention, and finally as a responsible voter (not the punk kid I was during those earlier elections) I decided to actually investigate this possibility further.  A recent article by Annie Lowery published in The New York Times provided a good place to start.

Global currency manipulation is an effort made by other countries in order to make their currency comparatively cheaper next to the US dollar. The promise most countries have made to avoid currency manipulation falls under the Article of Agreement of the International Monetary Fund. Even though the IMF and WTO supposedly prohibit these actions, there is little recourse taken against countries who routinely engage in manipulating their currency. There are several thoughts about  this.

First, manipulating currency to be cheaper makes the country’s exports cheaper, meaning that the US is more likely to import larger quantities of them. Secondly, some experts argue that by holding down their currency some governments are distorting capital flows by as much as 1.5 trillion dollars per year. That number translates into a net drain on the aggregate demand in the United States and the euro area. Millions of Americans and Europeans would likely be employed if countries did not manipulate their currency and instead worked to achieve more sustainable growth through encouraging higher domestic demand.  

The question then becomes, what would labeling China as a currency manipulator mean for the US economically? The answer ranges from not much to a trade-war doomsday. 

Let’s begin with the extreme. Labeling China as a currency manipulator opens the door for the US to place tariffs and other trade sanctions on Chinese imports. Of course, doing this may result in China imposing similar trade restrictions against the US, and, as Annie Lowery points out in her article, perhaps even tempt the country to deny contracts to American companies like General Electric and Boeing.

 This label could even hurt American jobs to a degree according to a report released by the Rhodium Group. The report cites that due to the recent surge in Chinese investment it can be estimated that majority-owned US affiliates of Chinese companies directly support approximately 27,000 jobs in the US today, a number that has increased by 17,000 from five years ago. Further, the report projects that by 2020 these Chinese firms will employ as many as 200,000 to 400,000 Americans.

Even if we disregard such projections and label China as a currency manipulator in an effort to save American jobs from moving overseas, and bring home those that already have, we have to ask ourselves what kind of jobs are we bringing home and do we really even want them back? In a US workforce that is trending more and more to the knowledge worker (who make up as much as 45 percent of the workforce according to some estimates), do assembly line and labor driven opportunities have a compelling place? 

I think it is more likely that other countries (some who are worse currency manipulators than China—i.e. Taiwan) would simply fill the vacuum that would open up if the US and China became pitted against one another in a trade war.

However, remember that this hypothetical trade war is our worse case scenario. What is more likely to happen if the US labels China a currency manipulator? Nothing. Again, unless the label is followed by tariff and economic sanctions, it does little but insult China. This insult, too, would seem to come at a strange time since China seems to recently be doing what the US has asked of it for years, strengthening their currency. Admittedly, China still only allows its currency to float under limits, but it is floating it nonetheless. It would seem that continued subtle, diplomatic pressure from whichever administration ultimately calls the White House home would be a better route to encouraging this positive trend than the use of the controversial label.

But labeling China as a currency manipulator sounds so much cooler and presidential, right? Which is probably why virtually every recent political candidate has promised to do so, yet never actually do. As far as political posturing goes, the idea is pretty effective, but in terms of economic policy it leaves plenty to be desired.   



Dillin said...

This was a great post Trevor. I only have a few comments I would like to add. First, I don’t care who makes my low cost goods. I also don’t like cheaters. There is no question that being subtle and diplomatic would be the best method, if it worked. The problem is that China has no real incentive to change. They might ease up on the currency manipulation a little bit in order to quiet the complaints, but as far as bringing their currency to an equal playing field, I just do see it.
As you said in your post, American jobs that come from trade with China is up, and will be as high as 400,000 by 2020. The problem I have with statements like this is that they assume that these jobs will otherwise not be created. Who is to say that these jobs will not be created with India or South America? Like I said before, I don’t care who makes my low cost goods.
I fully believe in free market principles. I also believe that a free market must have some regulations. The last thing I want to see is a trade war with tariffs. I don’t have the answer to problem with China, but I do believe that currency manipulation must be stopped.

Tyler said...

I liked this post. Many of the jobs that are sent to China are jobs that very few Americans have a desire to do. If anything, shifting less desirable jobs to other countries allows us to focus on more advanced jobs. There is a misconception that outsourcing jobs does nothing to create jobs in the United States. When we can get lower cost goods they become affordable to more people. Stores sell more of these goods, which requires more employees to sell them. Increased demand for goods leads to store expansions. This spurs growth in the construction, housing, and job markets.

While it is a problem that we are manufacturing less here, we should not be fighting so hard to bring all of the manufacturing jobs home. We should be fighting to manufacture products that are highly technical and demand a high level of expertise to produce. These are the jobs that will help improve the the living conditions in America.

Dave Tufte said...

Trevor: 100/100.
Dillin: 50/50.
Tyler: 50/50.

Holy cow Trevor. This is great! You should ... like an economist. Yeah!

I want to add two things.

First, I think most people's misconceptions in issues like this comes from putting the focus on jobs. But this is wrong. You work to consume. You don't consume to work. If China wants to purse a policy that makes goods cheaper for us to buy, that is good for us. And this is the primary effect. All other (usually more convoluted) arguments about jobs are secondary. Of course, some people might object to the social upheaval created by a loss of jobs. Trevor makes the point that these may not be jobs we want. I'd add that if they are eliminated that easily, why do we value them so much? On top of that, no one in these debates asks how on earth different jobs aren't created to mitigate the effect. This isn't a flippant observation. What the Chinese are doing is equivalent to taking us out for lunch, which is good for us, and we're complaining because this might put cooks at some other restaurant out of work ... without even considering whether they might look forward to the opportunity.

Lastly, I hate to say this, but you always need to keep the idea in mind that perhaps the reason politicians see China as an easy target is just ... bigotry. Bashing China is just as popular as bashing Japan used to be, or bashing Mexicans still is. It's a hard thing for me to say, but it's important that I do: it is troubling, and not at all odd, that we don't have much history of bashing countries of European extraction.

Morally, I'm sympathetic to Dillin's position. I wish the Chinese didn't do things like this. I also wish that, say, Cedar City wouldn't offer a tax break as an incentive to get a new firm to locate here instead of somewhere else. Unfortunately, this is the world we live in. Since I can't change that, I have to be content with the cheaper goods.

I like Tyler's position too, but I think he's forgotten that we could also produce services instead of goods.

Jon said...

I enjoyed reading the post and the comments. I also did not know what politicians meant by labeling China as a currency manipulator. After reading the post, I have a much better understanding of the issue. I think that the argument of labeling China as a currency manipulator is just political and as Dr. Tufte pointed out, bigotry. I think Governor Romney, and politicians in the past who argue this point, are simply trying to persuade Americans that there opponent is too lenient on China and they will not be. And many Americans like this stance because they have been taught to or have heard to fear China.

Dave Tufte said...

Jon: 50/50.

It's broader than that: we're all very tribal, so we have pre-installed buttons for the politicians to push on issues like this. If it's not China, it will just be someone else.