US should look closer to home on currency issue

09:52, March 24, 2010      

Email | Print | Subscribe | Comments | Forum 

The United States recently attacked China for "currency manipulation", which it said had caused the huge US trade deficit, while the latter defended its stance, saying the currency issue is not the major one determining the country's trade balance.

China's Xinhua News Agency recently upped the ante by charging that Washington itself is a long-time currency manipulator.

As the world's No 1 economic powerhouse, the US has long been paranoid about other nations "manipulating" their currencies to the advantage of their trade. In the 1980s, as is known to all, Washington forced Japan to revalue the yen in the name of redressing manipulation, which, however, led to anything but a narrowing of the US trade deficit.

Economists don't need to be Nobel Prize winners to know that currency value is but one - and in many cases not a crucial one - of the many determinants of trade balance. In fact, the imbalances - the heart of the US accusation - are but the structural effects of underlying economic fundamentals of the two economies in the terms of trade.

It would be boring to repeat plain economics, but the US tends to ignore the obvious. While undervaluation of the yuan can lead to a US trade deficit with China, its trade deficit with China doesn't necessarily lead to the conclusion that the yuan is undervalued.

The trade gap could be the result of multiple factors. China's low labor costs and failure to take into full account environmental costs in production, for example, have given Chinese products a sharp competitive edge in terms of price (which is actually detrimental to the well-being of Chinese workers and the environment).

Despite that simple logic, many US politicians and a few economists still accuse China of being a manipulator on the basis of the bilateral trade gap. Understandably, its adamancy has led to many suspecting that it's shifting blame for its domestic economic woes or even forcing others to dance in its tune, which is a de facto currency manipulation - not manipulation of the dollar, but the yuan.

While accusing others of currency manipulation, the US itself has long been seen as the prime manipulator. Xinhua was in fact not the first to challenge Washington's dubious role in the global monetary regime.

The US has an exchange stabilization fund, in the hands of the Treasury, to intervene in the foreign exchange market to influence exchange rates. Quite a few economists have pointed out that to maximize the effect of the dollar's value to its economy, the US has been manipulating the exchange rate of the dollar downward in the past decades.

Such an observation is seldom seen in mainstream Western publications, which are flooded instead with "China manipulation" coverage. It seems that what they want is the result of yuan appreciation, no matter how irrelevant it is to the US problem of the trade deficit.

Source: China Daily
  • Do you have anything to say?


Special Coverage
Major headlines
Editor's Pick
  • Houston Rockets vs LA Clippers: 93-99
  • Stunning beauty of dotted lake in Canada
  • Different way to see things -- X-ray vision
  • First tyrannosaur rex bone discovered in southern hemisphere
  • Artist's impression: nuclear bombing
  • Russian bombers "intercepted in British airspace"
Most Popular
Hot Forum Dicussion