Legislation to pressure China on its undervalued exchange rate is wending its way through the Senate this week. Addressing China’s undervalued currency would be a good thing: China’s exchange rate policies are partially to blame for the United States’ growing trade deficit, erosion of jobs providing middle-class livelihoods, and international financial imbalances that threaten to destabilize the world economy—and China’s economy, too. Policymakers should not pretend, however, that tackling the exchange rate issue will be a panacea for our economic growth, jobs, and competitiveness challenges.
China’s undervalued exchange rate policy in effect subsidizes its exports, while at the same time making exports from the United States that much more expensive in terms of China’s money, the renminbi (sometimes referred to as yuan). But China’s economic modernization and transformation from an inefficient agricultural producer to a nimble, technologically advancing, and globally competitive manufacturing economy rests on a much broader foundation of national economic strategy than just its exchange rate management.
China is making massive public investments in modern infrastructure and renewable energy systems, science and technology, education, and (more recently) social protection. The United States used to know such public policies are critical in providing a foundation for robust private-sector economic growth, and could do these things again today irrespective of China’s exchange rate—were it not for obstructionist politics in Congress.
But it’s not just China. Countries around the world are making public policy choices to boost employment levels and investments that enhance productivity and competitiveness in their economies overall by building advanced infrastructure and post-fossil-fuel energy systems by investing in education and worker training and by funding basic and applied scientific research and development that are so often the building blocks for commercialization of new, transformational technological advances.
China’s exchange rate matters, but addressing it on its own will not remedy the competitiveness challenges coming from China, India, Brazil, Germany, or any of the myriad other countries pursuing such national economic strategies while the United States is not.
In fact, China is already appreciating its currency—not by enough, to be sure, but not by a little, either. Between July 2005 and the global financial panic sparked by the collapse of the Lehman Brothers bank and AIG in September 2008, China raised its currency relative to the dollar by some 16 percent. Once the financial crisis dust settled, and China’s leaders were confident their strong fiscal stimulus policy had stabilized growth and employment, they once again began appreciating the renminbi by another 6.4 percent to date.
Overall, China’s currency is up more than 22 percent against the dollar in this time, but still the U.S.-China trade balance grows increasingly imbalanced. In 2005, trade with China accounted for 26 percent of the total U.S. trade deficit. Last year it amounted to 45 percent. That’s in part because public investments in China are paying substantial dividends, allowing China’s industry to rapidly close the productivity gap with U.S. producers.
It is important also to stress that the exchange rate conflict we see between China and the United States is not simply a matter of “Chinese national interests” competing against “American national interests.” The reality is somewhat muddier. Simply blaming China does little to resolve this problem.
In truth, there are many people in the United States who benefit tremendously from this arrangement. Americans with jobs benefit from China’s exchange rate policy because its exports are relatively cheap. Consumers get all kinds of goods more cheaply because of China’s growing economy—that is, consumers whose incomes have outpaced inflation. And the exchange rate also gives investors in China an advantageous exchange rate to access China’s labor power, its factories, its financial assets, and its natural resources and poorly regulated environment.
Sadly, the opportunity to buy undervalued inputs by moving production to China while earning overvalued dollar profits selling back into the U.S. market makes an attractive opportunity for the multitude of businesses who have abandoned entire communities and their workers across the United States over the past decade and more. Doing so has meant big profits for companies able to take advantage. Recent research from economists David Autor, David Dorn, and Gordon Hanson shows how increased imports from China fueled by this mutually beneficial exchange rate arrangement account for roughly 25 percent of lost U.S. manufacturing employment and social costs to communities amounting to as much as all the potential gains from increased trade.
No wonder unemployment is at 9.1 percent, state and local governments are cannibalizing public services while corporate profits are higher than they’ve ever been, and people are taking to American streets in protest.
Obviously, there are grand disparities between who reaps the rewards and who shoulders the burdens in the United States from this economic arrangement. This new bill working through the Senate won’t change that fact. It would instruct the Department of the Treasury to examine a more lenient set of criteria in making a call to impose countervailing sanctions against countries that manipulate the value of their currencies, or not. But Congress already vests Treasury with ample authority and discretion to do as it sees fit, and the new bill won’t resolve these underlying domestic political-economy tensions.
More importantly, if we want to continue to make the best products, offer the best services, and boast the biggest and most efficient economy in the world, we too need to make the public and private investments necessary to keep investors at home and draw more foreign investors to our shores. There’s plenty of capital in America but private investment is facing a hangover from the financial crisis and Great Recession. Consumer spending is held back by high indebtedness from bubble-bought house mortgages and attempts to rebuild savings after substantial losses to the family nest egg, stagnant incomes, and tenacious unemployment.
In addition, business investment overall lags for their fears of where sales growth will come from given high unemployment and low consumer incomes. And construction investment in particular still lags with its substantial “excess inventory” of commercial real estate to use up.
In the short term, it is clear that investment growth must come from the public sector as a way to crowd in and jump start the private investment needed to fuel America’s next expansion. Infrastructure modernization. Educating America’s youth. Developing the productivity of its workforce. Making investments in a broad portfolio of basic and applied science leading to civilizational advancements. There’s a lot we can do. And economics 101 tells us these are things we can do more efficiently together than we can do as private individuals.
Paradoxically, we face a moment where private investors around the world—and some public ones, too—are desperate to lend money to the U.S. government because they want us to make these investments and have confidence that public investments are what the world economy needs to get back on track. Yet political obstructers in Congress are standing in the way of sensible economic policy legislation, of which their opposition to the American Jobs Act is just the latest installment.
The United States will continue to contest a number of economic grievances with China but it is the contest at home for strong jobs and growth policies that will matter most for competitiveness and broadly shared prosperity in the American economy. This problem, and the 14 million unemployed Americans, can’t wait for November 2012.
Adam S. Hersh is an Economist with the Center for American Progress.