1、 with Andy Rothman RMB MADNESS Of course China is a currency manipulator! China is among a group of about 60 countries that peg their exchange rates to the dollar. But pegging isnt immoral or illegal, does not violate WTO or IMF rules, and for 15 years the US Treasury has found that it also does not
2、 violate American law. China is already the third-largest export market for US firms. And China is, by a huge margin, the fastest growing market for US goods. Between 2000 and 2009, US exports to China rose 330%, while US exports to the rest of the world rose only 29%. China is not stealing American
3、 jobs. The nonpartisan Congressional Research Service recently concluded that an undervalued RMB is expected to have no medium or long-run effect on aggregate US employment or unemployment. RMB appreciation will not solve Americas economic problems and will not reduce US unemployment. American consu
4、mers benefits. An undervalued RMB has helped keep US inflation low and has increased the purchasing power of US households. China has moved on its currency. From mid-2005 through mid-2008 the RMB appreciated 21.2% against the dollar, until Beijing suspended the process in response to the collapse of
5、 Chinas exports and the global financial crisis. China will move again, if given political space. Since last fall, we have been forecasting that Beijing will resume gradual appreciation in mid-2010, when a recovery in Chinese exports will enable Beijing to make a convincing argument to its own peopl
6、e that it is resuming appreciation on its own terms. Signals from the leadership. In recent weeks weve seen many signals that Beijing intends to do exactly what Washington is looking for: resume gradual RMB appreciation. We expect this to happen by the summer, as long as the US does not back China i
7、nto a political corner by making it appear that Beijing would be responding to American pressure. The US role. On April 15, Treasury should either decline to find China in violation of the US law, consistent with past rulings dating back to 1994, or postpone issuance of the biannual report. Either o
8、ption would give Beijing time to take the step the US desires, while avoiding the appearance of submitting to American pressure. The announcement an hour ago that Hu Jintao will visit Washington April 12-13 almost guarantees that Treasury does not intend to declare China a manipulator as defined by
9、US law. Chinas role. If the US does not tag China a manipulator, Beijing needs to reciprocate with a step that is in both countries interest: resumption of gradual appreciation, either shortly before the late-May bilateral security and economic dialogue, or after that meeting but before the June G20
10、. 2 Of course China is a currency manipulator! Despite protests to the contrary by some Chinese officials, there is no doubt that Beijing is manipulating the value of its currency, as the RMB is clearly pegged to the value of the US dollar. By definition, any non-free-floating currency is being mani
11、pulated. But Chinas currency manipulation isnt unusual - - about 60 countries peg their exchange rates to the dollar - - it isnt immoral or illegal, and it does not violate WTO or IMF rules. Under IMF rules, member countries are free to adopt any exchange rate regime, including pegging to the value
12、of another currency, but they are supposed to avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members. The US Congress borrowed this IMF language when it passed t
13、he Omnibus Trade and Competitiveness Act of 1988, a law which requires the Treasury to make the now infamous biannual decision as to whether any of Americas major trading partners are currency manipulators. Under Section 3004 of the law, the Secretary of the Treasury must decide if a foreign governm
14、ent manipulates its rate of exchange against the US dollar to prevent effective balance of payments adjustments or to gain unfair competitive advantage in international trade. But China isnt breaking the law Between 1988 and 1994, Treasury citied only three countries - - China, Taiwan and Korea - -
15、as having violated the US law by manipulating their currencies with what I will call nefarious intent. No country has been cited under the US law since 1994. Treasury stopped tagging China as a manipulator in December 1994, acknowledging that Beijing had taken important steps to reform its foreign e
16、xchange system, unify exchange rates, and liberalize domestic firms access to foreign exchange. Treasury noted that some restrictions remained, but since they were viewed as intended to provide the means to limit imports, Treasury determined that China was not manipulating its exchange rate to preve
17、nt effective balance of payments adjustment or to gain unfair competitive advantage in trade. Successive Republican and Democratic administrations have taken this view since 1994. For 15 years Treasury has acknowledged that there are other, non-nefarious reasons for Beijing to manipulate its currenc
18、y. A new study by IMF economists based on data from member countries over the period 1980 to 2006, found, for example, that there is ample evidence that, for developing and emerging market countries, pegged exchange rate regimes are associated with the best inflation performance. Fixed exchange rate
19、s, the IMF working paper concludes, help countries anchor inflation expectations, sustain output growth, and foster deeper economic integration. Beijing is manipulating its currency, but this has been done primarily to provide a stable economic and monetary policy environment to support domestic gro
20、wth and limit uncertainty in investment and trade decisions. Other policy steps by Beijing signal that the government is not excessively focused on promoting export growth, particularly for the low-value-added processed goods that account for half of Chinas exports. The minimum wage in Shenzhen, one
21、 export center, was raised by 74% from 2001, when China joined the WTO, to 2009. Last month, the minimum wage in Guangdong, the province that produces about one-third of all Chinese exports, was raised by more than 20%. Fred Bergsten, Director of the Peterson Institute for International Economics, i
22、s clearly wrong in arguing that Chinas exchange rate policy violates all relevant international norms. 01020304050607080901001993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Processing exports Other exports(%)3 Chinas economy is not export-led One reason many obser
23、vers focus on Chinas exchange rate is that they mistakenly believe Chinas economy is export-led, giving Beijing motivation to manipulate its currency to promote growth. But the ability of the Chinese economy to expand by 8.7% last year while net exports delivered a -44.8% contribution to GDP growth
24、is clear evidence that China is driven primarily by domestic investment and consumption. The role of exports in the Chinese economy is significant, but much less than most assume. Domestic demand is the primary growth driver in China. We recognise that saying China is not export-led sounds counter-i
25、ntuitive, since almost everything you buy appears to be made in China. But, in reality, most of those goods are merely assembled in China, with very little valued-added created there. Consider the 30GB video iPod, which went on sale in 2005 with a US retail price of US$299. When an iPod leaves China
26、 it has a factory cost of US$150, but only 5% of that - - US$7.50 - - was value created in China, as the high-value components were imported from other Asian countries and just snapped together in China. This is a key reason why economists use net exports (exports minus imports) rather than the gros
27、s value of exports to calculate GDP. Assembly of iPods in China does create jobs, but here, too, the impact is relatively small. Globally, workers received US$1.06bn in earnings from iPod-related jobs, or about US$25 per iPod sold. But Chinese workers received only about 2% of the global paycheck, o
28、r US$0.55 per unit sold. (iPod data is from The Center for Research on Information Technology and Organizations at UC Irvine.) About half of Chinas exports are just processed in China About half of all Chinese exports are processed, or assembled products such as the iPod. On average, only 4% of the
29、export price of these goods represents value created in China, and only that small share contributes to Chinas GDP. Youll remember from Econ 101 that GDP equals investment plus consumption plus exports minus imports. This formula, which applies to all economies, is designed to ensure that GDP exclud
30、es, for example, the value of a hard drive that is made in Japan, imported into China and snapped into an iPod. That hard drive costs US$73 and accounts for half of the factory value of an iPod, but it wasnt made in China and did not contribute directly to the Chinese economy. (The indirect contribu
31、tion - - including the jobs assembling and testing the iPod - - adds up to US$7.50 and is counted in the net export calculation.) In the years preceding last years export collapse, net exports - - the part of trade that actually contributes to the Chinese economy - - accounted for only 6-8% of GDP a
32、nd less than 1 percentage point of GDP growth. This is less than the combined contribution from domestic construction and real estate. This year, we expect a zero net export contribution to GDP growth, but with domestic consumption and investment healthy, we also expect GDP growth of 8-9%. -5-3-1135
33、7911131996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009(%)Final consumption Gross Capital Formation Net exports of goods and servicesGrowth in US Exports to Top 10 Markets, 2000-09330%47% 48%14%30%3%16%10%-24%-21%ChinaGermanyNetherlandsCanadaFranceS.KoreaMexico UKTaiwanJapan4 Chi
34、nas GDP growth by component China is already a key export market for US firms Another common misconception is that China is closed to US exports. In fact, China is the third-largest buyer of US exports, after Canada and Mexico. And China is, by a huge margin, the fastest growing market for US goods.
35、 Between 2000 and 2009, US exports to China rose 330%. In contrast, US exports to the rest of the world rose only 29% during that period. The second-fastest growth rate among Americas top-10 export markets was to the Netherlands, at 48%. Of the 435 congressional districts, 409 experienced triple-dig
36、it growth in manufactured exports to China between 2000 and 2008, according to the US-China Business Council. Chinas out-performance as a buyer of US goods continued during the global financial crisis. In 2009, US exports to China fell by only 0.2% YoY, compared to a 19% decline to the rest of the w
37、orld. Understanding the US trade deficit with China Some of the criticism of Beijings exchange rate policy is based on the growing US trade deficit with China. Lets start by putting the numbers in perspective, and by looking at the current account deficit, which covers the broader range of trade in
38、goods and services, income, and net unilateral current transfers. The US current account deficit with China has increased dramatically in recent years, to 63% of the total US deficit last year from 32% in 2006. But this increase largely reflects the fact that many goods the US previously imported fr
39、om other Asian countries are now being sourced from China. 5 A sizable portion of the rise in imports from China stems from its development as a location for labor-intensive final-assembly operations, according to the nonpartisan US Congressional Budget Office (CBO). Therefore, a considerable portio
40、n of the US trade deficit with China is effectively a trade deficit with much of Asia funnelled through China. CBO concludes that The increase in US imports from China that resulted from the relocation for the most part came at the expense of exports from other Asian countries - - and not at the exp
41、ense of goods produced by manufacturers in the US. . . Consequently, the effects on US manufacturers have not been as great as might appear on the surface. Correspondingly, the share of imports from the rest of the world in the US market would probably increase in response to any fall in the share o
42、f imports from China that might result from revaluation of the Chinese currency. In 2003, the CBO director told Congress that proposed legislation to increase tariffs on Chinese imports if Beijing did not appreciate its currency might somewhat diminish the trade deficit with China but at the expense
43、 of increases in the US bilateral deficits with other countries. . . Such legislation could reduce the multilateral trade deficit of the US by at most a small amount and, depending on the circumstances (in particular, if the legislation was pared with corresponding measures by China against US expor
44、ts), might even increase that deficit by a small amount. In 2005, the CBO director advised Congress that Chinas currency policy is not primarily responsible for the large US current account deficit. Another nonpartisan agency, the US Congressional Research Service, in 2008 pointed out that More than
45、 half of Chinas exports to the world are produced by foreign-invested firms in China, many of which have shifted production to China in order to gain access to low-cost labor. (The returns to capital of US-owned firms in China flow to Americans.) . . . These factors imply that much of the increase i
46、n US imports (and hence, the rising trade deficit with China) is largely the result of China becoming a production platform for many foreign companies, rather than unfair Chinese trade policies. The role of foreign investment in the US trade deficit is clear when we look at the list of Chinas top 10
47、 exporting firms in 2008: 7 of the 10 are foreign-owned, with 6 from Taiwan and one from Finland (Nokia). Of the three Chinese firms making the top 10 list, only one, Huawei, is a manufacturer (telecom equipment), while the other two are resources companies (CNPC and Sinochem). Is China stealing Ame
48、rican jobs? One of the most compelling, but also misguided reasons for pressing China to revalue its currency is the incorrect assumption that an undervalued RMB is a significant cause of American unemployment. The manufacturing share of total US employment began to decline decades before China beca
49、me an exporter. In 1949, when the Peoples Republic of China was founded, 23% of American workers held manufacturing jobs. Thirty years later, when diplomatic relations between the two countries were restored, and before the US imported anything from China, the share had fallen to 20%. A decade later, US imports from China were insignificant, but the share of manufacturing jobs had fallen to 16%. That trend has continued, and today the share is 9%. Surprisingly, however, little evidence links higher import penetrat
