The concept of currency manipulation may seem best suited for the pages of an economics textbook, but its consequences for Maine businesses are all too real.
The Chinese government has tied, or “pegged,” the value of Chinese yuan to the U.S. dollar, at a rate of about 8.3 yuan to the dollar. China’s central bank maintains that rate by using yuan to purchase billions of dollars. As a result, China’s currency may be undervalued by an estimated 15 to 40 percent, providing Chinese manufacturers an enormous subsidy on exports, and a nearly insurmountable advantage against U.S. producers.
In an open trading system, manipulation of currency like this undermines the concept of comparative advantage by creating market distortions. With a “floating” exchange rate system, like the U.S. has with most of the world, market forces would determine the exchange rate of the yuan to the dollar.
China’s pegged system keeps the exchange rate constant, without regard to changes in the Chinese and American economies.
The artificially depreciated yuan makes U.S. imports of Chinese products less expensive, while making our exports to China more costly. It reduces the price Chinese manufacturers pay for any aspect of manufacturing, relative to what American businesses pay. Indeed, China’s currency manipulation is an ever-increasing threat to U.S. manufacturing competitiveness across every sector.
The negative impact of China’s actions is real and immediate, and to see it, we need to look no further than our home state of Maine. Manufacturers here, many of which rely heavily on the value of their exports, have lost more than 17,000 jobs in the last three years, more than 20 percent of our manufacturing workforce.
At the field hearing I convened of the Committee on Small Business and Entrepreneurship in Lewiston in October, Maine businessmen drew a direct connection between their struggles and issues, including China’s fixed exchange rate. We stand to lose even more if this problem is not addressed.
To that end, I have joined my colleagues in calling upon the secretary of the treasury and the U.S. trade representative to work toward implementing a flexible exchange rate. In addition, I submitted testimony on this issue to the attention of the U.S.-China Economic and Security Review Commission, requesting that they review China’s violation of the principles behind Article XV of the General Agreement of Tariffs and Trade, which prohibits World Trade Organization members from using the exchange rate to frustrate fair and open markets.
As chair of the Senate Committee on Small Business and Entrepreneurship, I called on the General Accounting Office (GAO), the investigative arm of Congress, to review the extent of China’s currency manipulation, its effects on the U.S. economy, and its costs to U.S. workers and small businesses. That report will help instruct Congress on the possible courses of action we can take to further address this issue.
In addition, to move the matter forward, I am working to pass a resolution in the U.S. Senate that urges the Treasury Department to work closely with the International Monetary Fund to ensure that China moves toward a market-based exchange rate, and to push China to follow the spirit of free trade by eliminating the unfair advantage it has created by manipulating the value of its currency.
Thus far, with the administration taking the lead in discussions, some progress has been made. Treasury Secretary John Snow and Commerce Secretary Don Evans have both visited China to push for change. During his most recent visit to Beijing in October, Secretary Evans told the Chinese, “The smartest thing for China’s leaders to do is move as quickly as possible towards a true free-market system,” which would include a floating currency.
President Bush himself reiterated that challenge to the Chinese last month, calling for concrete progress toward a market-determined, free-floating exchange rate during his meeting with Chinese Premier Wen Jiabao. “Currencies ought to be valued,” the president has said, “based upon economic activity, fiscal policy, monetary policy of the respective governments, the potential for growth, and the potential for long-term viability of the economies.”
If China is going to continue reaping the benefits of being a part of the international economic community, than it is absolutely critical that it abide by its rules. If it does not, the administration should exhaust all options available to require China to live up to its international agreements, under U.S. trade law and through the World Trade Organization dispute settlement mechanism.
We have a responsibility to ensure that other nations operate on a level playing field. China’s illegal currency controls artificially tilt the balance. Our trading partners must act honestly, fairly and in good faith. On this issue, it’s clear China has a long way to go.
Republican Sen. Olympia J. Snowe of Maine is a member of the Senate Finance and Commerce committees, and is chair of the Senate Committee on Small Business and Entrepreneurship.
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