Commies warned on currency distortion... again

It looks as though the Bush administration has finally worked up the nerve to ask that China stop bending the US over a barrel with their monetary policy. The NY Times reports:

The Bush administration warned China on Tuesday that its currency policies were distorting world trade, and it brandished the threat of retaliation against the country's exports if Chinese leaders did not change course in the next year.

In language far harsher than it has used before, the Treasury Department declared that China's fixed exchange rate between its currency, the yuan, and the dollar posed a risk to its economy and the economies of much of the rest of the world.

The administration stopped short of accusing China of outright currency manipulation, a move demanded by American manufacturers who complain that the Chinese have artificially undervalued their currency to make exports cheaper in the United States.

This article addresses the increasing concern over the undervaluation of the Chinese yuan to the dollar. The Chinese government pegs their currency to the dollar at a ratio of about 8 to $1. Economists estimate that the yuan may be undervalued by as much as 40% compared to the dollar, and conservative estimates say the yuan is undervalued by 10%. In any event, the Chinese are creating problems for a US economy already facing adversity.

The manufacturing sector in China has grown by leaps and bounds in recent years, amassing a trade surplus between themselves and the US alone of $162 billion in 2004. This represents a 30% leap upward from 2003’s number. By pegging their own currency to the dollar the Chinese ensure that they will reap such windfalls from their exports to the US in the future as well. This is because even with a declining dollar, sales to the US will not be affected because the yuan will decline with it. It is no surprise that some economists are putting pressure on the Chinese to switch to a market based system as far as their monetary policy is concerned, and move away from the unscrupulous method they are currently using.

The US Congress is mulling over tariffs and other trade sanctions it could place on the Chinese to encourage them to change there policy. I would normally be completely against such measures as they stand against the tenets of free market capitalism. But considering the fact that the Chinese are cheating the system to begin with, such measures would be well deserved on the part of China. China is profiting at the expense of American exporters by undervaluing their currency.

Consider a situation in which the Chinese allowed their currency to float. Now also consider a declining dollar, which is what the US has been experiencing over the past 2 years. As the dollar declines on its own in this situation the Chinese yuan would appreciate against the dollar. Chinese exports would become slightly more expensive, but US exports would make up the difference and then some because more world consumers would want to purchase US goods. Also, domestic consumption would increase because Americans would be buying less from China and would turn to US producers.

But the reality is that none of these offsetting activities can take place, and as the dollar declines the Chinese take the yuan down with it. The dollar is in crisis while the Chinese laugh all the way to the bank because so called “free marketers” would rather we fall on our sword than check the Chinese with trade sanctions.

Some argue that putting pressure on the Chinese is out of line because they are a sovereign country who has their own right to manage their currency as they see fit. But if the Chinese wish to continue benefiting from the free market trade that large countries such as the US allow them to participate in, they should play by the free market rules across the board. The Chinese hardly care about the value of their currency compared to foreign currency since the state runs the entire economy and there is little if no concern as to how the Chinese citizenry are affected by such economic policies, as the so-called “rulers” of China are nothing more than self appointed tyrants who rule under the authority of the gun as opposed to the voting booth.