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.