One benefit of the fragile yet continuing growth in the United States (US) economy over the last 12 months is the restraining effect it has had on US political leaders who regularly clamor for the US to punish the People’s Republic of China (PRC) to raise the value of its currency.
The PRC’s exchange rate policy and the presumed threat it poses to US jobs has been a topic of debate in the US Congress for years. Critics of the PRC maintain that the US president, no matter what the political party, needed to staunch the flow of US jobs to the PRC by demanding that it increase the value of the renminbi or be punished by being labeled a currency manipulator.
Those critics took another shot at the PRC with new bipartisan legislation that would allow US companies, on a case-by-case basis, to seek countervailing duties against Chinese products to offset any advantages from the PRC’s exchange rate. Similar bills have passed the US House and US Senate but failed to receive final congressional approval. If we are lucky, the new legislation will face the same fate as its predecessors and will never become law.
As I recently visited the PRC, it would be useful to reflect on the state of the PRC and how US and PRC economic interdependence is influenced by the political struggles between the two countries. As one senior official in China Investment Corporation, the PRC’s largest sovereign fund, noted, we are at a critical time. He said that the US stance with the Committee on Foreign Investment in the United States, the blocking of capital investments, and the return of the issue of currency manipulation is putting pressure on the system. We need to be extremely careful as we are playing a dangerous game. There are plenty of Chinese projects and capital that could just as easily flow to Russia if we are not cautious.
Up until the currency bill’s introduction, recent signs in Washington DC suggested that the PRC currency valuation issue had fallen off the political agenda there, and not a moment too soon for many of us. This currency battle with the PRC has rung false for a number of reasons, not the least of which being that the attacks were bad diplomacy and worse economics.
There are far more pressing issues in Washington DC than the currency debate. President Barack Obama did not mention the Chinese currency in his State of the Union address in February, despite the fact it always draws a wave of bipartisan cheers. And it was only a minor topic of discussion in a recent US Senate confirmation hearing for newly confirmed US Secretary of Treasury Jack Lew, who was in the PRC when US lawmakers introduced their bill.
Much of the change in attitude over the renminbi is due to Obama’s re-election and the continued rebound in the US economy and employment. In addition, many in the US Congress believe more pressing and material issues dominate US–PRC ties: PRC’s increased militarization, the proliferation of Chinese-sponsored cyber warfare, and the PRC’s disregard for intellectual property.
More importantly, the RPC has adjusted the value of its currency over the last few years, although not at a speed that necessarily placates the PRC’s foes. Since June 2010, when the PRC agreed to float its currency against the US dollar, the renminbi has risen by 16.2%, an estimate adjusted for inflation (US Department of the Treasury 2013). It could do more, of course. The PRC could commit to a monetary regime guided by a commitment to transparency and appreciation in crafting its exchange rate policy.
I am glad to see some common sense applied to the US–PRC currency debate, especially because so little of it was applied last fall during the US presidential campaign when President Obama and Republican presidential nominee Mitt Romney fought to see which one was going to be tougher on the PRC. Romney even went so far as to announce that on the first day of his presidency he would label the PRC a currency manipulator.
No recognized economist—or international business leader, for that matter—honestly believes that being tough on the Chinese currency will increase jobs in the US or revive the US economy. US voters might think that, but only because they have been led to believe that the PRC has walked off with millions of US jobs by manipulating the renminbi.
The Obama administration needs to put the Chinese currency debate to rest for good. It has been the whipping boy for too long, giving cover to protectionist and xenophobic officials who would rather blame the PRC for US economic woes than confront the real source of the problem—globalization. Corporations go where labor is cheap and plentiful, and customers follow corporations with cheap goods.
US companies that have invested in Asia by shifting their low-cost manufacturing operations to the PRC and other more cost-effective (and politically agreeable) countries, such as Cambodia, Malaysia, and Viet Nam are not bringing those jobs back to the US, no matter what happens with the renminbi. If the renminbi were to rise, US companies would remain in the PRC and simply pass on the higher costs of production to their US customers because those corporations must stay in the PRC to sell goods there. Wal-Mart and other companies cannot leave the PRC to satisfy their US customers without sacrificing their Chinese customers and Chinese profits.
Globalization demands a new approach to job creation in the US that emphasizes education and training, public investment in infrastructure and research, and a commitment to public-private partnerships. This economic strategy will not only make the US competitive, it is a formula for any nation’s success.
What can the US do internally to address these competitive concerns? Plenty. We need a strategy for investing in skilled labor to offset the decline in vocational education over the last 30 years. We need to adopt an industrial strategy that emphasizes planning and investment across interrelated sectors, and, finally, we need to welcome the critical financial and leadership role of the US government in developing industrial goals and policies.
Letting the Chinese currency debate recede into history has the advantage of leveling the rhetorical playing field. Meddling in the Chinese currency may win points with labor unions and disaffected US workers, but it sets a tough standard for the US to follow. After all, the US Federal Reserve Board’s efforts to ease monetary policy have drawn complaints from other countries. This kind of diplomatic hypocrisy naturally undermines the US position globally on currency manipulation and economic equilibrium.
The Obama administration and the US Congress need to educate US citizens about the realities of globalization—nearly 18 years after the World Trade Organization came into being—and to craft an economic strategy for the US that ensures its workers and companies are competitive in the global marketplace regardless of the PRC’s currency exchange rate.
US Department of the Treasury. 2013. Report to Congress on International Economic and Exchange Rate Policies. Washington, DC.