China's currency manipulation continues to be a serious problem for the U.S. economy

Posted by scapozzola on 03/14/2014

At his confirmation hearing last year, incoming Treasury Secretary Jacob Lew faced some tough questions on China, with Sen. Sherrod Brown (D-OH) asking, “Do you agree that currency manipulation is in fact an export subsidy?”

The secretary danced, avoided saying the word "manipulation" and said that Washington had made great progress on getting its trading partners (China) to let its currency float to a marketp-oriented exchange rate.

But despite the professed optimism of the Obama administration, China’s currency, the yuan, remains significantly undervalued against the U.S. dollar.This depreciation serves to artificially lower the cost of China’s exports in the U.S. market while also raising the price of U.S. exports to China.

Unfortunately, Beijing has signaled that it won't accommodate U.S. concerns about currency undervaluation. As the New York Times reported late last month:

“China’s central bank has begun quietly helping the country’s exports. It has unsettled traders by intervening heavily in currency markets for the last week, pushing the renminbi down steadily…On Tuesday, the fall continued, bringing the currency’s loss against the dollar for the year so far to 1 percent…The recent decline also interrupts what had seemed to be a steady rise in the Chinese currency, which had been eroding the competitiveness of Chinese exports.”

This week, China further accelerated the depreciation of its currency, exacerbating the problem. As the Wall Street Journal reported on Monday:

“China's central bank weakened the daily reference rate for its currency by the largest percentage in more than a year and a half, continuing a push to drive the yuan lower…The 0.18% change represented the largest one-day move in the rate since July 2012.”

It’s fair to say that this continued currency manipulation, which violates China’s WTO commitments, is harming U.S. manufacturing competitiveness and costing U.S. jobs:

  • The U.S. trade deficit with China, fueled in large part by China’s currency undervaluation, hit another new record of $318 billion in 2013, up from $315 billion in 2012, and the fourth straight annual increase.
  • U.S. manufacturing job growth has essentially stalled as a result. U.S. manufacturing has added a mere 100,000 jobs so far in President Obama’s second term, far below the pace needed to reach the president’s goal of 1 million new manufacturing jobs by 2017.  

Overall, the U.S. trade deficit with China cost the U.S. 2.7 million jobs from 2001-2011, and that toll will continue until the currency problem is solved.

Meanwhile, a survey of economists warn that the repercussions of a slowdown in the Chinese marketplace will be dire for the U.S. They're correct, but not because of suddenly weak demand from Chinese consumers. Rather, it's because China's factories will continue production apace in response, and will just sell their goods elsewhere. That means a surge of imports in the American economy, financed in large part an artificially cheap yuan. We'll be watching for the wave in the next round of trade figures.

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