The Exchange

Labeling China a Currency Manipulator Not Best Strategy for Balanced U.S.-China Trade

In Monday's debate, Governor Mitt Romney reiterated his promise to use his first day in office to formally designate China a "currency manipulator," or a trading partner that keeps the value of its currency artificially low so its exports are cheaper for Americans and others to buy. If he ordered his Treasury secretary to issue such a declaration, it would force contentious formal negotiations on China's foreign-exchange policies, which, if unsuccessful, could lead to outright trade sanctions on China imports.

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U.S. politicians have complained for years that China unfairly gives its manufacturers an advantage by preventing its currency, known as the renminbi, from rising in value against the dollar.

While China does indeed restrict the amount that its currency is allowed to appreciate against the dollar and other currencies, confronting Chinese leaders about their currency management and trade practices would be politically tricky, and wouldn't necessarily be economically effective.

Currency Rising in Value

One dollar today buys about 6.25 renminbi, or yuan, down from about 6.8 when President Obama took office in early 2009, which means China's currency has in fact risen in value during his term. In 2005, when the Chinese currency was first allowed to float within certain limits on world markets, the exchange rate was more than 8 yuan to the dollar. China, then, has allowed its currency to appreciate, in a slow and measured way, against those of its trading partners, even if the yuan remains lower than most economists believe it would be if permitted to trade freely.

China is hardly alone among nations in trying to suppress the exchange value of its currency. Hong Kong maintains a strict "pegged" range for the Hong Kong dollar versus the U.S. dollar. Switzerland has been working hard to keep the Swiss franc, long used as a safe-haven currency by global investors, from appreciating too much. Some would even charge that the U.S. Federal Reserve's creation of trillions of new dollars to inject into the financial system in an effort to stimulate the economy has the effect of artificially cheapening the dollar.

However well getting tough on China plays on the campaign trail, though, sitting presidents have tended to use more-tactful means to seek better trade terms with China. As Richard C. Bush III of the Brookings Institution recently pointed out, Bill Clinton threatened to strip China of its "most favored nation" trade status, but was persuaded to back off that position once in office. Once in office, presidents and their diplomats have tended to opt for quieter discussions on China, trade and regional defense matters.

No Immediate Tangible Benefits

Labeling China a currency manipulator would only trigger mandated, low-probability negotiations with China aimed at having Beijing permit the yuan to float more freely. This would likely provide no immediate tangible benefits while antagonizing Chinese officials just as the Chinese Communist Party undertakes its once-per-decade transfer of power to a new president.

Romney has vowed to impose "tariffs where I believe that they are taking unfair advantage of our manufacturers." Yet the view of China's trade surplus with the United States as a serious hindrance to U.S. economic growth is a bit dated as well. China's balance of trade with America was vastly more lopsided five years ago, before the financial crisis dampened China's galloping growth rate. U.S. exports to China doubled last year from 2006 levels, while imports from China were up less than 25%, as the country has become a more important market for American companies to sell into. General Motors (GM), after all, now sells more cars in China than in the U.S., for one prominent example.

On a longer-term basis, China's growth strategy involves shifting from its heavy dependence on low-cost production of goods to export, to an economy driven more by domestic spending by Chinese citizens. If successful, over time, this effort would help nudge the U.S.-China trade equation toward better balance, without hostile charges of unfair play from Washington.

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