This post was updated at 1 p.m. EST, Sept. 30, 2010
As the financial crisis intensified, the value of the Chinese currency, or renminbi (RNB) soared against the U.S. dollar. In the summer of 2008, China — which relies heavily on exports — pegged the value of the RNB to the dollar. By preventing its currency from appreciating, China effectively devalued the RNB, helping locally manufactured goods become relatively cheaper and more competitive in foreign markets.
China’s weak currency policy doesn’t sit well with Washington. The administration has been pushing China to let the RNB appreciate, believing it would make American goods more competitive and shift manufacturing jobs to the U.S. With a stronger RNB, Chinese consumers could buy more American-made goods.
But for the time being, at least, China’s policymakers oppose substantial RNB appreciation against the dollar. During last week’s UN General Assembly, Chinese Premier Wen Jiabao warned that a 20 percent to 40 percent appreciation in the renminbi would lead to “major turbulence” in China.
So Congress is moving forward with plan B. On Wednesday, the House of Representatives passed the Currency Reform for Fair Trade Act. Based on the current language, the U.S. government would be allowed to impose tariffs on imports to compensate for the undervaluation of the RNB. The bill now moves to the Senate for approval.
This could ultimately be an economic disaster for the two largest economies in the world. It would make Chinese goods more expensive for Americans. And it would move jobs from China to other countries. A tariff is even worse than RNB appreciation because there would be no increased demand for American goods from Chinese consumers. Worse still, tariffs lead to retaliation. It is no coincidence that on Sunday, China imposed a tax on chickens imported from the U.S.
While a tariff may have terrible consequences, the administration’s argument for a stronger RNB is overly simplistic. While it is likely that an appreciating RNB would force manufacturing jobs out of China, those jobs wouldn’t necessarily come to the U.S. — they would go to the next lowest wage country. Most consumers already own goods that are “Made in Indonesia,” “Made in Mexico,” “Made in India,” etc. I recently purchased a Swedish-style bookshelf at Ikea that was made in Poland.
Another problem: A stronger Chinese currency would push up the prices of goods sold to Americans at retailers like Wal-Mart and Costco. Importers of Chinese-made goods would adjust prices to reflect new exchange rates, and the American companies that might have to move manufacturing out of China could face facility closure charges, manufacturing contract
cancelation fees, and new facility construction costs, all of which would be passed along to consumers.
To be fair, China’s suppression of its currency is effectively a tariff. Assuming it is truly undervalued, a weak RNB makes American-made goods artificially expensive and thus less competitive. Then again, the Currency Reform for Fair Trade Act would not be the first time the U.S. imposed a tariff either. Just over a year ago, the U.S. slapped a tariff on Chinese tires.
The Chinese and U.S. governments are looking out only for the interests of their own constituents rather than cooperating, which actually would be in the best interests of both. Ultimately, neither side gains much, if anything. As Larry David once said, “A good compromise is when both parties are dissatisfied.”
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