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Currency Conflict> Web Exclusive
UPDATED: October 21, 2010 Web Exclusive
Economist: Yuan Is Not Undervalued

Last March, the U.S.-based Economic Policy Institute published a report titled Unfair China Trade Costs Local Jobs, saying that the U.S. trade deficit with China cost 2.41 million jobs in the United States between 2001 and 2008. What do you think of this conclusion?

This notion doesn't hold water. In 1999 and 2000, when the U.S. trade deficit with China increased by $11.77 billion and $15.1 billion, respectively, the employed labor force in the United States went up by 3.172 million and 2.005 million people, respectively. By contrast, in 2001, when the trade deficit narrowed, the United States lost 1.78 million jobs and the renminbi's exchange rate against the U.S. dollar was stable during the year. The U.S. manufacturing industry lost 473,000 jobs in 2008. The figure spiked to 1.523 million in 2009, a year that witnessed the U.S. trade deficit with China shrinking by $41.2 billion year on year. There was no fluctuation in the renminbi's exchange rate against the U.S. dollar in 2009. Evidently, the job losses in the United States have nothing to do with either its trade deficit with China or the renminbi's exchange rate.

The changes in U.S. unemployment rates are fundamentally attributable to the country's economic cycles and productivity. Between 2001 and 2003, total production of the U.S. manufacturing industry shrank by 5.01 percent, while its productivity rose by 15.15 percent. Theoretically, 3.02 million jobs would be eliminated as a result. The actual figure was 2.896 million. Between 2008 and 2009, total production of the U.S. manufacturing industry went down by 9.6 percent while its productivity rose by 5.9 percent. Theoretically, 1.907 million jobs would be lost as a result, while the actual figure was a close-enough 1.996 million.

It is also irrational for some Western economists to blame China for the imbalances in the world economy given the wide belief that Wall Street greed and deregulation of the U.S. financial sector were the fundamental causes of the crisis. Another popular theory is that the imbalances are caused by imbalances within the United States, which has a much higher current account deficit than any other country.

In 2009, the United States saw a significant decline in its current account deficit. The main cause was that the U.S. trade deficit dropped by $315.26 billion, of which the decrease of the deficit in fossil fuels (mainly oil) accounted for 63 percent. The top reason for the U.S. trade deficit is its energy imports, which fluctuate mainly with oil prices. Speculation in the futures market is the core problem with oil prices, and the United States can only solve most of its deficit problems by regulating financial speculation.

Another important reason behind U.S. trade deficits is that U.S.-based multinationals set up manufacturing facilities overseas and import from their overseas branches. According to statistics from 2007, without such trade, the U.S. trade deficit would shrink by $234.5 billion, accounting for 28.2 percent of its trade deficits in 2007.

Therefore, the United States should take primary responsibility for global economic imbalances rather than blaming China.

Then why have some Western countries used the rhetoric of an "undervalued renminbi" to demand that China take on the responsibilities of a major country?

As a matter of fact, vocal critics of the renminbi's exchange rate are mostly members of the U.S. Congress. For example, Senator Chuck Schumer is neither an economist nor an expert on exchange rates. Naturally, his criticism of the renminbi's exchange rate has ulterior motives.

First, the criticism stems from the demands of U.S. domestic politics. When the economy is fragile and the unemployment rate remains high, it is very tempting for politicians to find other countries as scapegoats. During the campaign for the upcoming midterm election, in order to maintain its majority in the House of Representatives, the Democratic Party needs to try all-out to woo working-class voters by using job creation as a slogan. Usually, creating jobs requires increasing government spending to reduce employers' taxes and provide them with subsidies. The Obama Administration needs to spend between $30 billion and $50 billion to create jobs for 2 million people. But the huge deficits of the federal government make this unaffordable. Therefore, blaming China for the job losses is a convenient excuse to grab votes.

Second, it is out of the U.S. need to shirk its responsibility for causing the international financial crisis. The crisis started in the United States. However, there have been some odd opinions that China and the United States should each take equal responsibility for the global financial crisis, arguing that China's trade surplus led to excess liquidity in the United States. Some people go even further, saying that if China won't accept such a theory, it has failed to undertake its responsibility as a major country and should be blamed for future crises.

These accusations are ridiculous. Even if we ignore that it is impossible to calculate how much of China's trade surplus has become liquidity in the United States, without the greed of Wall Street and the lack of financial regulation, the subprime mortgage crisis would never have happened.

Third, it is out of the U.S. need to contain China. The historical lesson is Japan's lost decade after it agreed to let the yen appreciate under pressure from the United States. However, unilaterally forcing a sovereign country to make sacrifices cannot be repeated, and China will never sacrifice its own development in submission.

Facts prove that the renminbi's exchange rate has not inhibited the recovery of the world economy. The history of the last two decades tells us that dramatic fluctuations in the international currency market are always followed by economic turmoil or recession.

Currently, the foundation for global recovery is still weak and the European debt crisis is only starting to show signs of stabilization. China and other large economies should jointly keep exchange rates between major currencies stable and prevent financial speculation from arising again in order to create the basic environment needed for the stabilization and rebound of the world economy and international trade. Moreover, China has to maintain its stable and strong economic growth to provide the confidence and market for global trade. These will make China a responsible power.

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