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Robert Scott writes sanely and expertly when ferreting out the true
impacts of trade on the economy. He is a borderline heretic,
using facts and analysis instead of slogans and assumptions like the
wacko free traders. His position is Director of International Programs
at the Economic Policy Institute.
Dr. Scott's op-ed on Henry Paulson's impotent Strategic Economic Dialogue® appeared today in the Washington Times.
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Article published Dec 13, 2007
China's currency defiance
December 13, 2007
By Robert E. Scott - Early this morning the U.S. and China concluded
their third "Strategic Economic Dialogue" in Beijing, and there was no
reason to expect significant progress on one key issue of contention:
China's refusal to significantly revalue its currency, the yuan,
despite widespread agreement among economists and G-8 officials that
its substantial undervaluation is suppressing imports.
Unfortunately, Treasury Secretary Henry Paulson's approach has been
unlikely to move China on the currency issue or to address other urgent
issues on the table, including food and product safety. The
administration needs to work with the G-8 leading industrial nations
and other key trade partners to negotiate an international currency
accord with China and other currency manipulators, and be prepared to
use real threats of sanctions to persuade them to abandon currency
manipulation.
(read more)
Despite a sharp decline in the value of the U.S. dollar against the
euro and other major foreign currencies, it remains heavily overvalued
against the Chinese yuan, the Japanese yen, and the currencies of other
Asian developing nations and oil-exporting countries. China alone is on
track to purchase more than $500 billion worth of U.S. treasury bills
and other foreign exchange this year to artificially cheapen its
currency. This Chinese peg restrains other important trading partners
such as Japan from letting their currencies rise to sustainable levels
against the dollar for fear of losing export sales.
The U.S. trade deficit with China is projected to exceed $260 billion
in 2007, a 15 percent increase over 2006. This deficit will be more
than one-third of the overall U.S. current account deficit, the
broadest measure of our goods, services and income payments, which will
exceed $750 billion in 2007.
The U.S. must borrow or sell more than $3 billion worth of net assets
every business day to finance the current account deficit. The housing
crisis is making this harder to do, and both raise the risk of a run on
the dollar and flight from U.S. capital markets. This could cause
interest rates to soar, consumption and business investment to fall,
and pitch the U.S. into a severe recession.
In September 1985, the United States also suffered from large trade
deficits, and the dollar was similarly overvalued, especially versus
the Japanese yen. Then Treasury Secretary James Baker abandoned the
unilateral, "Free Market" approach of the first Reagan administration
and shocked financial markets by negotiating the Plaza Accord with
other members of the G-5. These countries then jointly intervened in
currency markets (by selling dollars and buying up other currencies),
driving the dollar down 17 percent until the Louvre Accord was
negotiated in February 1987, which stabilized the dollar at its new
lower level. The yen appreciated 36 percent under the Plaza Accord, a
reflection of how effective such agreements can be in realigning pegged
currencies.
Ironically, the Plaza Accord might never have happened were it not for
strong congressional pressure. The House twice passed its version of
the Rostenkowski-Gephardt-Bentsen trade act, which would have imposed a
25 percent import surcharge on countries such as Japan, Brazil, Korea
and Taiwan that maintained large trade surpluses with the United
States.
A new Plaza Accord should be negotiated, and it should be based on
clearly established target values for the dollar and other foreign
currencies. Currency intervention alone will not be enough to reverse
the damage from foreign currency manipulation. China and other currency
manipulators, as well as other members of the G-8, will need to
increase consumption at home since they will no longer be able to
depend on ever-increasing trade surpluses with the United States to
support economic growth.
The U.S. will also need to increase competitiveness in manufacturing,
which produces most traded goods, by increasing R&D spending, clean
energy investments and steps to address the health-care crisis.
Growth of the U.S. trade deficit with China alone has eliminated 1.8
million U.S. jobs since 2001. Halting currency manipulation could
prevent further job loss and support millions of new jobs in
manufacturing and other trade-related industries. A new Plaza Accord
could cut the risks of a U.S. recession by boosting exports and
eliminating a possible dollar crisis.
The first step should be to begin currency negotiations with major
trading partners. Congress could jump-start the process by passing
tough trade legislation. This would force the administration to act,
and give it a credible threat and negotiating leverage with China and
other currency manipulators.
Bilateral talks aren't working with China. It's time for a new approach
based on the strong leadership of the original Plaza Accord.
Robert E. Scott is senior international economist at the Economic Policy Institute (EPI).
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