There is no question that China is playing games with its currency, buying and holding foreign currencies to keep the RMB weak and Chinese products cheap. But there is a very serious question about what, if anything, we can or should do. We can label China a "currency manipulator," but ... then what? China can let its currency appreciate, but ... then what?
Let's not delude ourselves. It will take more than a slightly higher Chinese currency to bring off-shored jobs back to the United States. Those jobs are a casualty of globalization, not currency manipulation, and producing the next generation of export market jobs will require a long and patient strategy beyond China's exchange rate.
But to get a taste from the other side -- to hear how talking sternly to China might help job creation -- I spoke with Robert Scott of the Economic Policy Institute, a liberal think tank that specializes in labor issues. This is an edited transcript.
China is keeping its currency artificially low. So what?
China's currency manipulation makes its goods artificially cheap. Chinese goods cost 40 percent less than if the currency were properly valued. This acts as a tax on US exports. This hurts our competitiveness not only in China, but also everywhere else where we compete with China, where our products seem more expensive.
What products do we compete with China?
China produces all sorts of high tech durable goods. They make billions of computers, machine tools, steel, tires, paper. Those are all places where they are rapidly developing excess capacity.
If China's currency started to appreciate, what would we see? Higher exports? Fewer imports? A healthier world economy due to a stronger Chinese consumer?
Probably all of the above, and more. In order of importance, we would export more to the rest of the world. We would export more to China a little, but there are so many non-tariff barriers in China that I don't think US-China exports [would increase much]. Imports from China would continue to grow, but the rate of growth would slow from maybe 15 percent a year to 5 percent.
Let's say the price of Chinese goods goes up, but we keep importing those goods, because China is still the cheapest place to get these particular products. Couldn't our trade deficit grow even wider?
There was a study done by [the government] that looked at the price of imports from China when the RMB appreciated 20 percent between 2005 and 2008. In that period, that actual price paid for China imports went up only 2 percent. So China kept prices down despite its rising currency, through productivity advances and subsidies and eating the margin. They continued to export products at a low price.
But the trade deficit continued to grow.
Yes, the trade deficit continued to increase, but at a slower rate.
This gets to my main question: How will pressuring China on its currency actually create American jobs?
I think we can create as many as a million jobs by getting currencies realigned, and bringing down the trade deficit. It's not just the Chinese who are manipulating their currency. There's the Thai currency, the Indonesian currency, the Korean currency, even Japan and Switzerland. All of these [currencies] have been heavily manipulated.
So the currency challenge is much broader than China and the RMB. Is the hope that calling out China will have a domino effect with bringing currencies in line?
That would be my hope.
Let's say the president makes you Exports, Trade and Manufacturing Jobs Czar. What's your plan for closing the trade deficit and creating jobs here?
It has to start with getting currencies realigned. The thing we have to do is to threaten China and any country engaged in serious currency manipulation with tariffs. We need greatly increased trade enforcement. We need to highlight illegal behavior, like when countries prohibit imports of some products. of require companies to purchase domestic. Those are illegal under WTO, but we don't enforce it.
Next, we need major investments in rebuilding manufacturing. We need a big program of investment in clean energy products. Last, spending hundreds of billions of dollars a year on infrastructure will make US industries more competitive, it will help our manufacturing services, and it will create demand for manufacturing products. The American Society of Civil Engineers says that just to maintain the existing highways and bridges will cost $1.2 trillion. Now is the perfect time to do it.