THE BLOG

Treasury Staying the Course on China Currency, Best Option for United States

01/03/2012 02:32 pm ET | Updated Mar 04, 2012

The release this week of the U.S. Department of Treasury's report on foreign exchange rates has prompted another round of unproductive finger pointing on China and its currency valuation practices.

Many in Washington, including members of Congress of both parties, are convinced that if China appreciates its currency, the renminbi, it will level the playing field on the trade imbalance between the United States and China. The U.S. Senate even went so far as to pass legislation in October to force the Administration to punish China, with members asserting the move would spark a wave of U.S. job creation. Nothing could be further from the truth.

The Obama Administration's decision to reprimand China for its currency valuation without calling it out as a "currency manipulator" in the semi-annual Report to Congress on International Economic and Exchange Rate Policies follows the path of least resistance and common sense. "While China's real exchange rate has appreciated, the process of appreciation remains incomplete," the Treasury said, noting that the yuan "is persistently misaligned and remains substantially undervalued."

Persistently high U.S. unemployment has understandably created significant frustration in Washington. But the answer is not to damage one of this country's most important trade relationships with a tit-for-tat battle of tariffs and import barriers in hopes of reviving the U.S. economy. Trade imbalances do contribute to America's economic woes but they are not the reason the United States has been unable to revive its lagging job growth.

More importantly, attacking China's currency policy will trigger serious consequences: wholesale layoffs of U.S. workers and higher prices on goods for American consumers. Punishing China will create jobs, but not in the United States. U.S. companies will shift their low-cost manufacturing operations from China to other more cost-effective countries, forsaking the United States and its high-priced workforce.

The United States has little leverage against China to force a wholesale appreciation of the yuan against the dollar. China has adjusted its currency in the last five years, but it has done so as much for its own reasons as it has in response to its trading partners' complaints. The gradual appreciation of its currency has helped China maintain its economic stability, avoid the risk of inflation and build an economy that relies on the manufacture of advanced goods rather than inexpensive goods with low-profit margins.

China's approach, in fact, is a model of self-sufficiency that the United States should emulate, a conclusion echoed by the Federal Reserve Bank of St. Louis last spring.

"The United States cannot expect any quick labor market fixes due to Chinese currency revaluation," concluded Brett W. Fawley and Luciana Juvenal in the St. Louis Fed's The Regional Economist in April 2011. "Instead, the United States would be best advised to follow China's suit in identifying and exploiting its own comparative advantages."

I've had a number of recent conversations with small business owners about congressional efforts to force the Obama Administration to discipline China, and their reaction was heartfelt and unanimous: The legislation is disastrous.

One small business owner, who owns a company that outsources production of inexpensive leather briefcases to China, said that any increase in the value of China's currency would force him to either layoff employees at home or pull out of China. Production won't come home to the United States, however, but will likely shift to Vietnam, Cambodia or Malaysia.

Another small business owner, who manufactures musical instruments at a discounted rate in China, said that he would most likely be forced to layoff staff in the United States, downsizing employees to offset lost revenues from a boost in production costs in China.

Moreover it is hard to imagine that retail giants like Walmart that are so embedded in China and working so diligently to enter its marketplace would suddenly bring their operations back to the United States. If the yuan rises, they will stay in China and simply pass on the higher costs of production to their U.S. customers.

Frankly, it is unlikely that the manufacturing jobs outsourced to China will come back to the United States. The annual income for a minimum wage worker in China is approximately $1,500, compared to an annual income of $13,920 for a U.S. minimum-wage worker. This is not a gap that can or will be reduced by appreciating China's currency.

Leaving the management of the complex economic relationship between China and the United States to the whims of Congress this close to an election year is not only ill-advised but it could prove catastrophic for the U.S. economy. The Obama Administration has wisely taken the path of moderation, persistently reminding China that the economy is global and that protectionist measures, in any form, eventually hurt the country employing them. Congressional leaders should follow the president's lead.

Dr. Doug Guthrie, dean of The George Washington University School of Business (GWSB), is professor of international business and management at GWSB, and is an expert in the fields of economic reform in China, leadership and corporate governance, and corporate social responsibility.