Published on March 27th, 2012 | by Jared Hall

Changing China’s Currency Calculus

As efforts to reinvigorate the American economy continue, one of the administration’s highest priorities should be collaborating with Congress on current proposals – including the Currency Exchange Rate Oversight Act – aimed at restoring a fair and balanced trade relationship with China. Doing so will protect existing jobs, create new ones and help secure a prosperous future for America.

The U.S.-China trade relationship has long-been massively imbalanced – imports have far exceeded exports since the 1960s. This trend has progressively worsened and it has cost American jobs. A report from the non-partisan Economic Policy Institute estimated that between 2001 and 2010, 2.8 million American jobs were lost or displaced due to the trade deficit. Part of the blame for this trend lies with inexorable changes due to globalization, but a large portion also belongs with China and its market-distorting practice of currency devaluation.

The Chinese no longer peg the renminbi directly to the dollar – as they did for many years – but they have continued to hold its value artificially low through other means. China’s economic growth has far outpaced the American economy over the past decade, which under normal circumstances would lead to an increase in the renminbi’s relative value. Instead, the Chinese currency has remained undervalued and China’s exports to the U.S. have become much cheaper as a result. This has helped drive U.S. manufacturers out of business, exponentially increased the American trade deficit – from $30 billion in 1994 to $268 billion in 2008 – and put thousands of Americans out of work.

Fred Bergsten, a former Assistant Secretary of the Treasury for International Affairs and current director of the Peterson Institute for International Economics, recently wrote that a 20 percent increase in the renminbi’s value would reduce the U.S. current account deficit by nearly $100 billion. Such a policy would be a major job creator – for every $1 billion improvement in the trade balance, the U.S. gains about 6,000 jobs. With a modest increase in the renminbi’s value, up to 600,000 jobs could be gained. It certainly won’t solve all of our economic woes, but it’s a logical first step.

So how does the Obama administration achieve this goal and begin to rebalance the trade relationship with China? Unfortunately there is no simple answer, but a measure being considered by Congress may provide a way forward. The Senate recently approved the Currency Exchange Rate Oversight Act, aimed at forcing China to allow the renminbi’s value to reflect market forces. The House is currently considering the same bill. If the Chinese do not significantly revalue the renminbi, the law would impose retaliatory tariffs on imported Chinese goods and send a strong message to Beijing.

The current proposal is far from perfect. Regardless, the Obama Administration and the Treasury Department ought to work with Congress to create a logical, effective set of policy initiatives that will place greater pressure on Beijing while remaining consistent with our international trade obligations. Indeed, China knows that its currency is undervalued and is committed to the renminbi’s eventual appreciation. A strong American response that takes place within the multilateral trade governance system will spur Chinese leaders to act more quickly and decisively.

To be sure, ending Chinese currency devaluation will neither completely erase the U.S. trade deficit nor immediately jumpstart the American economy. It is not a cure-all solution, but it is a step towards fixing the structural economic problems that have made this recession so deep and so painful.

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