I thought it might be interesting to gather up the various views that have been expressed on the China currency issue. I have two key questions in mind:
1) Is the Chinese currency peg at an (allegedly) undervalued rate bad for the U.S. economy/global economy?
2) If it is bad, what is the appropriate response?
Here's a brief rundown of some views expressed by prominent bloggers/op-ed writers/others on each point, in no particular order.
Is the Chinese currency peg bad for the U.S. economy / the global economy?
Don Boudreaux says it's good for the U.S. and bad for China:
Scott Lincicome thinks a change in the policy would be bad for U.S. manufacturing:
Gary Becker thinks it's an overall plus for the U.S. economy:
Paul Krugman thinks it's bad for the global economy:
Tensions are rising over Chinese economic policy, and rightly so: China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done.
And it’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.
Arvind Subramanian says it's protectionism (and is thus bad):
If it is bad, what is the appropriate response?
Some want to impose a tariff on Chinese imports:
Economist Robert Aliber:
Some want countervailing duties applied to Chinese imports in the amount of the undervaluation:
we urge the Department of Commerce to apply the U.S. countervailing duty law in defense of American companies who have suffered as a result of the currency manipulation. The U.S. is permitted to respond to subsidized imports where the elements of a subsidy are met under the countervailing duty law. The countervailing duty law outlines a three-part test to identify the presence of a countervailable subsidy: 1) that it involves a financial contribution from the government; 2) that it confers a benefit; and 3) that is specific to an industry or a group of industries. China’s exchange rate misalignment meets all three parts of this test and therefore merits the WTO-permitted application of countervailing duties.
Some want the Department of Treasury to declare China a currency manipulator:
we ask the Department of Treasury to include China in its bi-annual agency report on currency manipulation. Since 1994 Treasury has not identified China as a country that manipulates its currency under the terms of the Omnibus Trade and Competitiveness Act of 1988 (“Trade Act of 1988”), but Secretary’s Geithner testimony to the Senate acknowledging that fact surely justifies the inclusion of China in the report. After labeling the country as a currency manipulator, Treasury should enter into negotiations with China regarding its foreign exchange regime. These combined actions will signal the government’s willingness to take decisive action against China’s currency manipulation, including the potential filing of a formal complaint with the World Trade Organization.
Some want IMF surveillance or a WTO complaint:
Some want a new WTO agreement (working with the IMF) on exchange rate undervaluation:
Some want to get the WTO involved in some undefined way:
Some want to focus less on trade, and also prefer the multilateral to the unilateral:
Some want the U.S. to set its own peg:
Have I missed anything? Feel free to add it to the comments.
Personally, I think an intentionally undervalued currency can be a form of protectionism. I'm not qualified to determine whether a particular currency peg qualifies as "intentionally undervalued," but a lot of smart economists and others seem to think that is what is going on here. Of course, there are always winners and losers from any particular trade policy. I agree that some U.S. consumers are better off with the current situation. But on balance, I think it would better for the world economy if production decisions were based on market forces.
As to the response, the proposal for a new agreement related to currency undervaluation is my preferred option. But I recognize that will be difficult to achieve. In terms of specific action by the U.S. (and others), it seems to me that a WTO complaint is the least confrontational, in the sense that it would mean submitting the issue to a neutral arbitrator. But the effectiveness of such a strategy is uncertain.