Growing trade deficits with China eliminated or displaced 2.4 million U.S. jobs between 2001 and 2008. China's manipulation of its currency, the Renminbi (RMB), is responsible for at least 1 million of these displaced jobs. The best estimates show that the RMB (or yuan) is undervalued by at least 40%, which makes U.S. goods 40% more expensive for Chinese purchasers and makes Chinese goods artificially cheap in the United States (and to a lesser extent around the world). China said over the weekend that it will follow a more flexible exchange rate, but as we learned yesterday, this does not ensure that the RMB will increase in value. While the RMB rose slightly on Monday, China's big, state-owned banks intervened to pull it back down to the level of last week's peg in overnight trading.
History shows that China will not allow its currency to rise significantly unless it is faced with the threat of real trade sanctions. In 2005, 67 members of the Senate approved legislation that would have imposed trade sanctions if China failed to revalue its currency. While the Senate measure never became law, that summer China did allow its currency to float, and it rose 20% over the next three years.
The world economy cannot afford to wait another three years for China to revalue, nor can we depend on China's central bank to act responsibly. Congress must set a firm target and deadline for China to achieve a 40% revaluation of its currency.
China's Central Bank announced that it will allow its currency to fluctuate 0.5% per day. Congress should give China until November 15 to raise the value of its currency by 40%, from the prior peg at 6.82 yuan per dollar to 4.85 (yuan per dollar). This will require the RMB to increase by 0.35% per day in this period.
Senator Charles Schumer told the U.S. China Commission last week that he and other colleagues would push for a vote on China currency legislation (S.3134) "within the next two weeks." Congress should also impose a currency manipulation adjustment tariff that would raise the effective exchange rate to 4.85 yuan per dollar on any goods imported from China that arrive in the United States on or after November 15, 2010. No tariffs would be due if the RMB appreciates by 40% or more by that date. We also need to get tough with other currency manipulators such as Hong Kong, Malaysia, Singapore and Taiwan, but it will be much easier to work with those countries after China revalues.
China would surely respond to the threat or imposition of such a tariff by rapidly revaluing its currency. This would be in the best interest of the United States, the European Union, and most other countries around the world. It would also be good for China. It would encourage China to liberalize labor unions, increase wages, and take other steps to raise domestic demand for goods made in that country. It would also help manufacturers from the United States and other countries to compete on a level playing field, for the first time in more than a decade, and set the stage for sustainable world growth. It is time for China to shoulder responsibility for its own growth in the G-20 and the world economy.
This piece was originally posted to epi.org on June 23, 2010.