In a lengthy interview on Sunday March 13, 2010, Chinese premier Wen Jiabao again rejected calls from the United States and other members of the international community to stop artificially undervaluing China’s currency, and to allow the yuan to find its real value.
Premier Wen made these comments soon after President Obama specifically called for China to unpeg the yuan from the dollar, and just weeks before the U.S. Treasury is required to release a report that will formally state whether the Obama Administration believes China is manipulating its currency, as many experts have concluded.
By locking in a specific exchange rate that undervalues its currency, China makes its exports cheaper across the world, and makes U.S. and other countries’ exports more costly.
China’s position on this issue is not new. What was new, however, was Wen’s claim that efforts by the U.S. and other countries to end China’s manipulation of the yuan are, themselves, a form of protectionism. Such a claim is novel, and appears to reflect a determination by the Chinese government that it needs to go on the offensive on this issue. This suggests a new level of concern on the part of the Chinese government over attacks on its currency policies, and also is an additional example of China’s more aggressive posturing in recent months on important issues including international trade policy and climate change. Whether China intends to pursue this theory more formally remains to be seen.
China’s continued defense of its policy of undervaluing the yuan reflects at least two major concerns. First, China needs to continue its own economic recovery, and its undervalued currency provides a subsidy that effectively reduces the price of its goods. Indeed, China’s exports increased an extraordinary 45.7 percent in February 2010 compared to a year ago. By keeping the yuan undervalued, China effectively exports both its goods, and also its unemployment, to the United States and the rest of the world.
Second, China holds a massive amount of U.S. debt—over $750 billion—in the form of Treasury bonds. Any move that increases the value of the yuan vis à vis the dollar will automatically decrease the value of these investments. The consequences of this would range from reducing China’s ability to acquire badly needed sources of raw materials across the world, such as copper in Africa and Australia, to an increased risk of unrest at home when the Chinese economy slows its rapid pace of growth.
For U.S. manufacturers, China’s currency policy impedes economic recovery by making their products most costly across the world. Our government already has a powerful tool, in the form of countervailing duty (subsidies) investigations conducted by the Commerce Department, to determine exactly how much the yuan’s undervaluation subsidizes Chinese exports, and to offset that unfair advantage in the U.S. market. In fact, less than three years ago the Commerce Department specifically affirmed its authority to investigate subsidies given by the Chinese government. The Commerce Department could use its existing authority and substantial expertise, immediately, to address the unfair advantage enjoyed by Chinese exporters due to the yuan’s undervaluation. Yet each time a U.S. industry has requested that Commerce address the issue in an investigation, the government has declined to do so. Given the President’s recent comments, Commerce’s continued refusal to look into China’s undervaluation of the yuan is perplexing and ripe for change. In fact, Commerce has the power to take this issue on, immediately, in several ongoing investigations.
President Obama’s recent comments on this issue and on the need to double U.S. exports in the next five years as a key to our recovery may indicate the Administration is moving closer to meaningful action on the issue. For many U.S. manufacturers, such a development would be welcome, and long overdue. How committed the Administration is to addressing this issue will become apparent in the coming weeks as Treasury speaks in its annual report on currency manipulation. For its part, the Commerce Department can send a clear signal by investigating this issue right away.