Senate's China Currency Bill is Folly

On the eve of the US-China summit, the US Senate is considering alterations to the proposed Currency Exchange Rate Oversight Reform Act of 2011. While the bill and the Senate alterations are constitutional, barely, they are not in the best interests of the United States. In fact, it would not be excessive to call them foolish. Quiet diplomacy is the only way the Chinese will be convinced to let their currency appreciate. This kind of legislation will only make them dig their heels in.

Under the proposed law, the US Treasury will have to analyze exchange rates and issue semi-annual reports, and the Treasury must negotiate with countries found to be manipulating their currencies to resolve the issue, except "where such negotiations would have a serious detrimental impact on vital national economic and security interests." In short, this has no teeth but will annoy Beijing.

The Senate's provisions go beyond manipulation, requiring Treasury action if currencies are "fundamentally misaligned." Import duties are required to balance out this unfair subsidy, and the currency must be taken into account when deciding on anti-dumping actions. After a while, the US government would be barred from buying from the country in question, and the case goes to the WTO. The president could put the process on hold, but congressional action could over-ride this (which is constitutionally suspect). Moreover, a 9-member body would be created to consult with the Treasury in the report process, and 8 of its members would be appointed by Congress.

There is no doubt either in Beijing or Washington that the yuan (also known as the renminbi, which doesn't sound like a currency so much as a disease caused by a vitamin deficiency) needs to rise in value. China has a huge trade surplus with the US because the yuan-dollar rate is out of alignment. A stronger yuan will increase the price of imported goods to the US, lower the trade imbalance between the two, and improve living standards among the Chinese workers. So, why doesn't China let its currency rise?

The single word answer is "jobs." In his ghost-written, white-wash memoirs, George W. Bush recounted that he liked to ask every world leader "what keeps you awake at night?" It's a good question as it gets to the heart of a political (or business) leader's vision. When he asked that of Chinese President Hu, the reply was "creating 15 million jobs a year." If the People's Republic of China fails to do that, it is going to have huge social problems. The Communists might even come back. And China creates jobs via exports. It could boost domestic consumption, and that may generate the needed jobs. Yet the leaders don't want to bet their future on it. They will only change when circumstances force them to do so.

Outside pressure is not sufficient to make the new, confident China change policies on its own. Indeed, Beijing is suspicious of outsiders -- based on the last 200 or so years of history, the suspicions are not without foundation. That is not to say that the rest of the world can't negotiate with China. Nor will China ignore the interests of others in the give-and-take of standard diplomacy. What China will resist is being lectured by the US Congress.

© Copyright 2011 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.

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