Dr. Peter Morici of the University of Maryland commented on Ben
Bernanke’s recent comments on China currency manipuation.

In the prepared text for a speech at the conclusion of high-level
meetings in China, Ben Bernanke noted that China’s undervalued yuan
provides an "effective subsidy" for firms that "focus on exporting." He
used the word subsidy three times in prepared remarks but backed away
from this language in his actual speech

Press coverage noted the rash of “protectionist” legislation on Capitol
Hill, and that such an acknowledgement of Chinese policies would place
pressure on the Bush Administration to take such actions.

Dr. Peter Morici

This constant reference to prospective measures to offset Chinese
currency subsidies as “protectionist” is an unfortunate and misleading
use of language that has no sound basis in WTO law or the economics of
the situation.

By any reasonable reading of the WTO rules, Chinese currency
intervention is an export subsidy. China’s currency intervention
provides a monetary benefit to exporters by putting yuan in the hands
of foreign purchasers, and for Chinese businesses to gain access to
this benefit, they must export.

WTO rules treat export subsidies as among the most egregious forms of
protectionism, because these directly impede free trade based on
comparative advantage. Export subsidies lower GDP, globally, by
fostering imprudent investments and the inefficient use of labor and
capital both in the exporting and importing countries.  WTO rules
strictly prohibit export subsidies, and empower importing nations to
impose countervailing duties or tariffs to neutralize and essentially
suspend their harmful effects, if the exporting country will not cease
these practices.

As things stand, Chinese GDP may be raised by Beijing’s intervention in
currency markets to lower the dollar value of the yuan; however, U.S.
and EU GDP are lowered by even more, and global GDP is reduced on net.
This is a basic theorem of modern international economics and
comparative advantage. Americans do not perceive this income loss,
because we are borrowing from China to make up the difference, but that
debt will require burdensome interest payments in the future.

A countervailing duty or tariff, which removes the benefit bestowed by
an export subsidy, is considered a reasoned and measured response under
WTO rules and NOT protectionist. The Bush Administration has been shy
about using the subsidy word, because acknowledging Chinese currency
intervention for what it is would require such a non-protectionist
reaction.  It has been convinced by economists at Treasury with
strange gaps in their formal training, of which Mr. Bernanke is not
one, that Chinese currency subsidies are somehow different from other
export subsidies.

The press and the Bush Administration should find another word to use
rather than "protectionist" to describe legitimate self defense against
an aggressive mercantilist practice like currency manipulation.

China may need a stable currency for developmental purposes. However,
that purpose could be served by a yuan pegged at 4 or 5 to a dollar
instead of 7.82. That would not require persistent sale of yuan for
dollars and euro in currency markets and would not create an export
subsidy.
 
A lot of blue collar workers are losing jobs in industries where the
United States enjoys a comparative advantage, thanks to subsidized
imports from China that would not be profitable at a market based
exchange rate, even if fixed by Beijing.  Redressing the harm
ordinary working Americans endure would not be protectionist but merely
self defense.

Peter Morici is a professor at the University of Maryland School of
Business and former Chief Economist at the U.S. International Trade
Commission.

Peter Morici
Professor
Robert H. Smith School of Business
University of Maryland
College Park, MD 20742-1815
703 549 4338
Cell 703 618 4338
pmorici@rhsmith.umd.edu
http://www.smith.umd.edu/lbpp/faculty/morici.html
http://www.smith.umd.edu/faculty/pmorici/cv_pmorici.htm