At an event hosted last week by The Aspen Institute "Is U.S. Trade Policy Helping or Hurting Manufacturing?
" featuring former U.S. Trade Representative Susan Schwab and Jared Bernstein, there was a lively debate on a number of issues relating to trade and manufacturing. While there were differences of opinions on most topics, there was a strong consensus (including among the attendees) on one topic: China is a currency manipulator.
Here are the details of that consensus, as I understand it:
1. China manipulates its currency by keeping the dollar overvalued and the yuan undervalued.
2. That currency manipulation gives China an economic advantage that harms the U.S.
3. The U.S. and other countries should individually or collectively take steps to persuade or force China to stop its manipulation.
4. Solutions to China’s currency manipulation range from direct legislation like the bill passed in the Senate that will impose stiff tariffs on Chinese goods if the Treasury finds evidence of currency manipulation, to other forms of indirect pressure on China to persuade it to stop manipulating its currency.
Let me break from that consensus and present an alternative position:
In the best of all possible worlds for the U.S., China would use its labor and capital to manufacture consumer products like clothing, footwear, furniture, electronics and appliances and send $300 billion worth of these products to U.S. consumers for free every year, as a gift, or a form of foreign aid to the American people. In addition, the Chinese would produce and send to America another $100 billion worth of raw materials, parts, industrial supplies, inputs and natural resources at no charge, as a gift to American manufacturers every year.
Can there really be any argument that such an arrangement, where America would receive $400 billion worth of free goods every year from China, would be to the unquestionable economic advantage of the U.S.? (Note: That’s roughly the amount of goods we will purchase from China this year.)
However, that extreme Chinese generosity is probably not realistic. Here's a second best outcome:
Instead of sending $400 billion of goods annually for free, China offers an attractive alternative. It will send us $500 billion of goods every year, both consumer goods and industrial goods, but will sell us those manufactured goods at a substantial 20% discount, for only $400 billion. In that case, the amount of foreign aid will be less than the $400 billion in the first case, but will still be significant - a $100 billion gift every year from the Chinese people to the American people.
How will China generate the $100 billion in foreign aid to the U.S.? One way is to keep its currency undervalued to bring about the 20% discount on its products.
Which then raises the question: If China is willing to undervalue its currency and in the process provide $100 billion of foreign aid annually to the American consumers and businesses buying Chinese products, what’s the problem? Why should we complain?
And that is my main point: the "manipulation" of China's currency is actually to the distinct advantage of American consumers (especially low-income Americans) and American businesses buying products "made in China." They certainly aren't complaining about low-priced Chinese products, and in fact would be made worse off if China was forced to revalue its currency and in the process make its products more expensive to Americans.
So if neither American consumers nor U.S. import-buying businesses would benefit from a stronger yuan and a reduction in China's "foreign aid," who would really benefit? The same groups that always benefit from protectionist, mercantilist trade policies: domestic producers who compete against foreign rivals.
We know from economic theory that protectionist tariffs produce benefits for domestic producers, but also higher costs for domestic consumers. Further, the costs to consumers from protectionism are greater than the benefits to producers, resulting in a net loss for the country and a reduction in its standard of living.
Likewise, I would argue that forcing China to appreciate its currency would be equivalent to a protectionist tariff on Chinese goods, and would make American consumers and import-buying companies, and the country as a whole, worse off.
Summary of my position on currency manipulation:
1. China's currency manipulation is a form of foreign aid, and to the direct advantage of millions of U.S. consumers, especially the poor and low-income groups, and to the direct advantage of thousands of American companies buying inputs from China.
2. Forcing China to revalue its currency would benefit some American manufacturers competing with China, but would significantly harm those American consumers and businesses currently buying undervalued imports. On net, there would be more harm to American consumers than benefits to American manufacturers, making the country worse off.
3. Like other forms of mercantilism and protectionism, revaluing China’s currency would favor certain domestic producers over millions of consumers, but would make the U.S. worse off, not better off, on net.
4. Finally, instead of complaining, we should be thankful for China's foreign aid to Americans through an undervalued currency, overvalued dollar, and undervalued goods that save Americans billions of dollars every year.
Update: If you wouldn't object to China sending products to the U.S. for free, then on what basis would you object to currency manipulation that allows you to purchase undervalued Chinese imports at a huge discount and great bargain?