A Free Solution to the Jobs Crisis: End China’s Currency Manipulation

A bipartisan group of senators, led by Sens. Chuck Schumer (D-N.Y.) and Lindsey Graham (R-S.C.) recently introduced a revised version of a bill that would facilitate actions to remedy currency misalignments with countervailing duties, or tariffs. The legislation adds to growing pressure on the Obama administration, whose Treasury Department is required by law to rule whether China manipulates its currency by April 15.

China has resisted efforts to change its currency policy, largely because so far it has worked so well. The country has grown rapidly with an aggressive strategy of inviting foreign capital to finance industries oriented to export, first and foremost to the United States. 

Normally the growth of Chinese trade surpluses – nearly $400 billion in 2007 before the Great Recession hit – would have led to appreciation of the value of its currency. But Chinese authorities sold renminbi and bought dollars – eventually accumulating $2.4 trillion in dollar reserves at the end of last year. The strategy of pegging the currency to the dollar made Chinese products artificially cheap for U.S. consumers.

Even when China agreed temporarily to let the value of the renminbi rise slightly, its economic productivity rose so much faster that Bergsten figures Chinese exports were even cheaper at the end of that modest appreciation.

It seemed like a sweet deal for American consumers, who outspent national income by 45 percent from 2000 to 2008, as they benefitted from cheap products and low interest rates tied to Chinese policies, according to testimony Wednesday before the House Ways and Means Committee by Harvard historian Niall Ferguson. Never mind that many of those consumers lost jobs and income partly because of the competition to which they were subjected.

But it was an even sweeter deal for companies – many of them U.S.-based multinationals – who chose China as an export platform. And their profit came at the expense of American workers. In a new study released Tuesday, EPI economist Scott calculates that unfair Chinese trade – with currency manipulation as its centerpiece, along with suppression of labor rights and other subsidies – led to the loss or displacement of 2.4 million jobs from 2001 to 2008 as China’s trade surplus rose to 68.5 percent of the U.S. total trade deficit, excluding oil.

Scott counts jobs as displaced if they would otherwise have been generated in the U.S. if not for the current trade deficit. (Critics argue some exports might have simply shifted from factories in China to facilities in other countries. But it’s worth noting that other Asian exporters also manipulate currency values to stimulate exports and could be subject to the same pressures to change strategies as might be applied to China.)

The biggest job losses come not from low-tech industries that have famously lost many jobs to Chinese exports, such as apparel and textile, but from high-tech computers and electronics (which accounted for 40 percent of the growth of the trade deficit with China from 2001 to 2008), Scott reports. There were also large job losses in other manufacturing and metalworking industries, as well as some service industries, such as administrative support and professional, scientific and technical services (about 139,000 jobs lost).

Every state lost jobs, Scott found, but California, Texas, New York, and Illinois topped the job loss list, even though states like New Hampshire, North Carolina, and Massachusetts lost a higher percentage of their workforce.

At the Ways and Means hearing, Bergsten, Ferguson and Economic Strategy Institute president Clyde Prestowitz all agreed that the renminbi was undervalued and harming the United States. (Philip Levy of the conservative American Enterprise Institute minimized the harm and focused on the potential risks and problems of any action against China, sounding like an apologist for American businesses in China.) The three mainstream, center-right analysts also all argued for multilateral action through the G-20, International Monetary Fund, World Trade Organization, diplomatic pressure and other mechanisms, although at an EPI conference last week Bergsten sounded more open to unilateral U.S. action as a last – and probably necessary – resort.

But Schumer, in a Tuesday conference call, argued that ​“China won’t do anything they aren’t required to,” and the only reason the Chinese had even made a modest revaluation earlier was the threat of U.S. action. Schumer said both Democratic and Republican administrations had turned a ​“blind eye” to the obvious problem in the past. By defining the issue as ​“misalignment” rather than ​“manipulation” in the new bill, he hopes to get beyond the question of Chinese intent, and make it easier to apply countervailing duties on all Chinese exports.

Introducing the revised bill at this time puts the Obama administration as well as the Chinese government on notice. In 2005, the earlier version got a bipartisan 67 votes in the Senate (but never came to a vote in the House). Schumer vowed to bring the new bill to a vote this spring regardless of the April 15 Treasury ruling on currency manipulation.

Ultimately, Chinese policies hurt not just developed countries like the U.S. but also other developing nations, making it harder for them to export. And they depress the incomes of Chinese peasants and workers. While the $2.4 trillion reserves and its currency controls help protect China from globally induced panics, like the 1997 Asian crisis, it also means that China can’t use those funds for developing infrastructure, establishing a modern welfare state, and other measures to improve popular living standards.

Much of what China did in recent years resembled what the U.S., Europe, Japan and other industrial countries did to develop their industrial capacities, and the calls for one undifferentiated global free market set of rules ignores the need for policy variations. But postwar Germany and Japan let their currencies appreciate more freely as they became strong exporters.

Krugman argues that China must be pressured to change now, first, because of the scale of the problem. ​“Never has there been as dramatic a misalignment,” he told an EPI conference last week. (And the scale of the problem is compounded by the size of the Chinese economy.)

Second, Krugman says, the state of the world demands Chinese adjustment. There’s a global loss of demand and deep recession as the U.S. and other leading nations are caught in a liquidity trap (where central banks can’t stimulate demand by cutting interest rates). China can’t expect its mercantilist policies to prevail in a world with depressed demand in the same way some people – though not the workers losing their jobs – found cheap Chinese exports tolerable when the economy was growing (albeit quite weakly during the past decade).

From a domestic economic and political standpoint, action on Chinese currency manipulation is essential. ​“Not only is there a huge pay-off – at no cost,” Bergsten says, ​“but if you want to have a serious export strategy [as Obama has proposed], if you want to have a serious jobs strategy, if you want to return to anything like full employment in the United States, the exchange rate has to be at the top of the list, and the Chinese currency at the top within it.”