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Response to Zalatix (Reply #79)

Fri May 18, 2012, 07:02 AM

80. sigh. it ain't that simple. there is collusion between the us & china because the arrangement

 

benefits certain interests in both places.

The peg is often referred to as "manipulation," but it doesn't really fit the bill for two reasons. First, it is an official policy. China targets the value of its currency quite openly; it is not doing it in the middle of the night when no one is looking.

The second reason is that China's mechanism for targeting the value of its currency is something that on alternate days our Treasury actually requests. They buy up U.S. government debt.

If this seems absurd, it should because it is. The way in which China keeps its currency down against the dollar (or keeps the dollar up against its currency) is by buying huge amounts of U.S. government bonds.

The media often tells us that we need China to buy our debt. This is not true. There are plenty of other potential investors, including the Federal Reserve Board. However we cannot both want China to buy U.S. government debt and then complain about China's currency manipulation. This is how they "manipulate" their currency.


http://www.huffingtonpost.com/dean-baker/economic-conflicts-with-c_b_1144116.html


The NYT did a piece on Governor Mitt Romney's pledge to impose tariffs on China to pressure it to lower the value of the dollar relative to the yuan. At one point it noted that many business people are opposed to this position:

"business leaders, while pressing for China to open its markets and protect intellectual property, caution that labeling China a currency manipulator could backfire, harming those efforts."

There is a direct conflict in the interests of most workers and many businesses in U.S. policy toward China.

Financial firms like Goldman Sachs and Citigroup have a major interest in getting more access to China's market. Firms with claims to intellectual property like Microsoft and Pfizer have a major interest in getting China to offer increased protection for their copyrights and patents.

By contrast, workers in the United States have a major interest in lowering the value of the dollar against the yuan. Since other countries would likely follow China in allowing their currencies to rise relative to the dollar (this is exactly what happened in 2005, the last time China had a large re-valuation of its currency), the result could be millions of new jobs in manufacturing. This would offer a large number of relatively good-paying jobs for less educated workers, putting upward pressure on the wages of these workers.

The Obama or Romney administration must decide which goals it will prioritize in its negotiations with China. If it makes more progress in getting access to China's financial markets for Goldman Sachs and Citigroup or increased protection of Microsoft's copyrights then it will make less progress in persuading China to raise the value of its currency.

Whoever is in the White House will have to decide which group's interests are pursued and which group's interests are downplayed. It would have been worth making this conflict more clear to readers.


http://www.cepr.net/index.php/blogs/beat-the-press/china-policy-the-99-percent-versus-the-1-percent

The government could even counter China’s currency peg by establishing a peg of its own of the dollar against the yuan. It could offer to buy yuan at a considerably higher value than the official Chinese rate, thereby putting upward pressure on the Chinese currency. If China tried to counter such a move, they would end up paying vast amounts of money to acquire over-valued dollars. They lose big in this story.

However, the Obama Administration, like the Bush and Clinton administrations before it, has opted not to try to push down the value of the dollar. In fact, as a matter of official policy, the Obama Administration claims to be committed to a strong dollar.

If the United States is not prepared to take steps to lower the dollar, then we are pursuing a policy that makes us like Greece. We have an over-valued currency that makes our goods and services uncompetitive in international markets. Therefore we run huge trade deficits and cannot get back to full employment without enormous stimulus from the government sector.


http://www.cepr.net/index.php/korean-op-eds/greece-and-the-united-states/


To take a third case, the value of the dollar is enormously important in determining the distribution of income. The over-valued dollar is the main factor behind the US trade deficit. It swamps everything else we may or may not want done in terms of trade policy, competitiveness policy or industrial policy. If the dollar is over-valued by 30 percent it is roughly the same as giving a 30 percent subsidy on all the goods that we import while imposing a 30 percent tariff on all of our exports. It is incredibly difficult for domestic producers to overcome this sort of disadvantage.

Furthermore, it is not an accident what sectors of the economy are exposed to international competition. In principle, almost any sector of the economy can be opened up to trade. For example, in the case of health care, we can have laws that make it very easy for foreign born doctors to train to US standards and then practice wherever they want in the United States. We can also set up a legal and institutional structure that makes it easy for people to travel overseas for major operations to take advantage of the much lower prices charged in many countries.

However, neither path has been pursued in our trade negotiations. The main area where our negotiators wanted ‘free trade’ was in manufactured goods. This put US manufacturing workers in direct competition with their much lower paid counterparts in the developing world. This policy has the predicted and actual effect of lowering the wages of manufacturing workers in the United States. And since manufacturing has historically been a source of relatively high paying jobs for the 70 percent of workers without college degrees, this trade policy put downward pressure on the wages of this group of workers as whole.

This downward wage pressure is aggravated by the over-valuation of the dollar. The over-valuation of the dollar is conscious policy that dates back from Robert Rubin taking over as Treasury Secretary in the Clinton years. Rubin publicly advocated a high dollar since his first days as Treasurer, but he got the chance to put real muscle behind this policy through his engineering of the bailout following the East Asian financial crisis. Rubin’s deal was that the countries of the region would repay their debts in full (no write-downs), but we give them the ability to do this by allowing them to run huge trade surpluses with the United States.

The harsh treatment of the East Asian countries was a warning to the rest of the developing world. They adopted a policy of accumulating massive amounts of reserves to avoid ever being in the same situation as the East Asian countries. This means lowering the value of their currencies against the dollar so that they could run large trade surpluses. This continues to be the policy pursued by most developing countries so that the flow of capital is running from poor countries to the United States, rather than the other way around as the story goes in economics textbooks.

In short the United States has deliberately put in place a trade and dollar policy that disadvantages the bulk of the workforce for the benefit of employers, importers and those looking to invest overseas. The fact that manufacturing workers have done badly over the last two decades has nothing to do with random market outcomes. It was the result of deliberate policy.

http://www.nakedcapitalism.com/2011/11/the-end-of-loser-liberalism-an-interview-with-dean-baker-part-i.html



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