Overvalued Legislation

The undervaluation of the Chinese currency demands multilateral, not unilateral, action

From an American perspective, China is a cheap country to live in. Living in Beijing this summer, I marveled at how affordable everything—from a train ticket to tutoring—was. Only after a bit of Web-surfing did I realize: if it seems like it’s too good to be true, it probably is. My $8, four-course gourmet dinners, I realized, were the manifestation of an economic imbalance, and one that the U.S. Senate is well aware of.

Lately, the Senate has shown a high level of enthusiasm for legislation relating to the issue of currency. Over the summer, both the Finance Committee and the Committee on Banking, Housing, and Urban Affairs have overwhelmingly passed separate bills that require the secretary of the Treasury to report annually on which countries, if any, practice “currency manipulation,” or have exchange rates that give the country an “unfair advantage in international trade” and “result in an accumulation of substantial dollar currency reserves.” According to the recent bills, should a country be identified as a currency manipulator, the U.S. government would then impose punitive antidumping tariffs on imports from the country. In addition, one of the bills stipulates that the Overseas Private Investment Corporation (OPIC) could not approve any new financing with respect to a project located in a country whose currency was deemed fundamentally misaligned. Considering both bills’ recent high levels of support in Congress, many expect the introduction of a consolidated bill soon, one that incorporates all of these ideas into a single piece of legislation. This legislation would be targeted—its specific purpose would be to pressure Beijing to reevaluate the yuan, China’s currency.

The legislation, introduced in June and speculated to be reintroduced during the Senate session in progress now, should not come up for vote. The U.S. Treasury is currently addressing the Yuan’s undervaluation through discussion with the Chinese government. This is the right—and only—course of action that should be taken.

The yuan is indeed undervalued, and this does negatively affect the U.S. economy: The current exchange rate results in low production costs in China, allowing Chinese businesses to produce products (which they then import to the U.S.) whose prices are lower than the prices of their American-made counterparts. The U.S.-China trade deficit is, in part, a result of this phenomenon.

A tax on Chinese imports, however, would not directly bring about reevaluation of the Yuan but rather would falsely make Chinese products seem “more expensive.” This would address the symptoms of the problem rather than its cause.

The White House and the U.S. Treasury oppose the legislation, with good reason, on the grounds that its economic consequences are unclear—James McGregor, past chairman of the American Chamber of Commerce in China and a current member of the National Committee on U.S.-China Relations, commented, “Ask five different economists what the long-term effect of this legislation will be and they’ll give you five different answers.” Nonetheless, current anti-Chinese sentiment, brought about by concerns about imported-product safety and about China’s environmental policy, may push this legislation through Congress before lawmakers really think about the problem of currency undervaluation and the best ways to go about addressing it.

The legislation’s political consequences, however, are manifest. By taxing Chinese imports, the United States would adopt a protectionist stance that would set an international precedent contradictory to the promotion of free trade. Further, in forcing OPIC to deny new financing to countries with “fundamentally misaligned currencies,” the bill would distance the U.S. from the very emerging market economies that the government would want to participate in free trade.

Given China’s economic size and importance, ensuring a positive U.S.-Chinese relationship is essential to both countries’ economic stability. The U.S. and China together account for more than 40 percent of global growth in the last five years. So far this year, the U.S. has imported more goods from China than from any other country except Canada, and China has been our fourth-greatest consumer of exports (after Canada, Mexico, and Japan). Given the intertwined nature of our business interests, any legislation that directly hurts China’s economy will also indirectly harm ours. Passing this legislation would mean shooting ourselves in the foot.

The White House and the U.S. Treasury are aware that the undervaluation of the yuan is a problem, and have been taking steps to address it. Treasury Secretary Henry M. Paulson and Chinese Vice Premier Wu Yi’s discussions about U.S. and Chinese economic policies are much more likely to result in positive economic change, including re-evaluation of the yuan, than is heavy-handed congressional legislation. For the sake not only of the U.S. and China’s future relations, but of the global economy at large, Congress should abandon the currency bills that it is currently considering.

Justine R. Lescroart ’09 is an English and American literature and language concentrator in Quincy House, and is currently studying abroad in Granada, Spain. Her column appears on alternate Wednesdays.