Is there a currency war going on? Yes, it has been going on for some time. It’s up to China to end it.
China has taken a number of steps over recent years to boost and “protect” its economy, building industries and providing badly-needed jobs. Good for them. But they have succeeded and they need to recognize that, and they also need to recognize that their own mercantilism is now causing huge imbalances and tensions in the rest of the world. China can’t have everything, imbalances are huge and growing and if they continue to try to have everything they risk a great fall nd risk bringing all of us down with them.
One – just one – of the ways China has been gaining advantage is by manipulating currency rates. They have a scheme that has enabled them to evade market forces resulting in their currency being as much as 40% out of balance. This means goods made there cost up to 40% less than goods made here, even before accounting for other trade manipulations they engage in. So companies have been moving factories to China. Entire industries have been migrating to China.
But this evasion of market forces can’t go one forever and the longer it goes on the worse the effects will be when it rebalances. Robert Kuttner explains why we’ve got to fight this before we lose our remaining leverage and can’t.
Others are starting to fight back in this currency war that has been going on. In September Japan finally got fed up with lack of progress ending China’s currency manipulation, and started manipulating their own currency in response. Then Brazil. Other nations are joining in. Our own House of Representatives passed a bill last week requiring the administration to act. So it is coming to a head.
Of course everyone has something to say.
There is an argument that bringing China’s currency to market rates won’t fix everything. That is correct.
Many argue that Chinese subsidies and currency manipulations mean our own consumers pay less for things we get from China. Yes.
Steven Roach says our own low savings rate is a problem. Yes.
Robert Reich says a weaker dollar makes us poorer. Yes- some of us.
Dan Ikenson says that the raw materials and components China imports will cost them less. Correct.
All of these are correct. But here is the thing: it is also correct that China’s currency is possibly as much as 40% out of alignment. I hate to state the obvious, but bringing China’s currency to market rates will bring China’s currency to market rates, which means that markets can balance and adjust and react as those markets are supposed to do.
There are always winners and losers. Right now in China there are currently winners and losers from the manipulated currency rate. If rates adjust to where they should be China might lose some jobs, but Chinese workers will immediately be higher-paid relative to the world than they had been, and Chinese consumers will also be more able to buy things made elsewhere.
Right now those in control of industries that are moving to China are winners and those in China who want to import are losers. And as is the way of the world the winners in China are fighting to keep their advantages, while the losers want change to occur. And outside of China the winners are fighting to keep their advantages, while the losers want change to occur.
But if China brings its currency to market rates the world’s winners and losers will be the winners and losers for the right reasons. It is time for China to move on from currency manipulation.
