Proposed US Bill Targets China for Keeping Currency Low

You would think a bill with bipartisan support on Capitol Hill would be welcomed by the nation’s political leaders.

But one such bill currently before the US Senate has both President Obama and House Speaker John Boehner worried.

The bill is called the Currency Exchange Rate Oversight Reform Act and it would punish China for undervaluing its currency.

It would allow the US to put duties on goods from China that the US deemed to be artificially cheap.

China has warned that passage of the bill could trigger a trade war with the United States.

Anchor Marco Werman talks to Daniel Rosen, a partner at the Rhodium Group, an economic advisory firm. He has studied China’s economy for a long time.

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Marco Werman: I am Marco Werman. This is The World. You would think a bill with bipartisan support on Capitol Hill would be welcomed by the nation’ s political leaders. But one such bill currently before the US Senate has both President Obama and House Speaker John Boehner worried. The bill is called the Currency Exchange Rate Oversight Reform Act and it would punish China for undervaluing its currency. It would allow the US to put duties on goods from China that the US deemed to be artificially cheap. China has warned that passage of the bill could trigger a trade war with the United States. Daniel Rosen is a partner at the Rhodium Group, an economic advisory firm and he has studied China’ s economy for a long time. Daniel we need some user-friendly economics from you here. Explain in a nutshell how a country like China can under or overvalue its currency. How does it actually work?

Daniel Rosen: Well there never have been tablets handed down from the heavens that told us how we had to manage our currencies. Some nations have freely traded, freely floating exchange rates for their currency like the US dollar does. Other countries, especially developing countries, prefer to have a managed exchange rate so that they are less prone to be affected by, say, financial speculators from Wall Street. And that’s certainly the case with China. Every day, at the end of the day, their People’s Bank sets the closing rate for the currency for the day and that would be the rate that is used starting the next morning when trading reopens.

Werman: So the Chinese Yuan is managed, as you say, by the Chinese government. Do the Chinese have a good argument for doing that, specifically for keeping their currency low?

Rosen: So there are really two different things. Managed currency and an undervalued currency are not the same thing. Otherwise, we would have an open-and-shut case here. Chile manages its currency. Hong Kong manages its currency. Many countries that the United States has excellent trading relations with have managed currencies. The question is, is it managed in order to undervalue it so that the country’s exports will be cheaper, or is it managed for financial stability in a way which doesn’t reduce value just in order to goose up exports.

Werman: Okay. So, let’s get to why the US cares about this because, presumably, the US feels that it is undervalued. Cheap Chinese goods means a trade imbalance with China and some people say that means fewer jobs here in the US. Does the value of the Chinese Yuan have a direct effect on how many jobs there are here in the US?

Rosen: The answer is no. It has an indirect effect on US employment. But very few things that the United States is currently importing from China would instantly come back to jobs in Illinois, or Massachusetts, or Florida if China changed its currency policy. Most of what we are buying from China we would buy from Mexico, or Brazil, or India, or Cambodia or someplace else if and when the Chinese exchange rate changed significantly. Where we do have a really legitimate concern here is that China is such an important part of the low-end world manufacturing base nowadays, that if China is perceived to be undervaluing its currency then so many other countries around the world are going to feel compelled to follow suit. And pretty soon nobody knows what’s there and what’s not there anymore. But I think the legitimate American concern is with whether China is playing by the ‘big boy’ rules or still just trying to maximize its own narrow advantages here, because it’s having a bigger and bigger impact on how the rest of the world feels about issues like this.

Werman: Well, I was going to ask you, how does the rest of the world see this particular issue? Are other countries seeing this as something strictly between the US and China or is there concern that it is bigger than that and could get even bigger?

Rosen: I think few countries have been willing to take on China in an international debate. But, I think most would privately say that they pretty much agreed with the United States on this issue. That, while the Chinese may not have been undervaluing their currency say 5 or 10 years ago, the fact that China has built up such a large external trade surplus in recent years and hasn’t allowed the currency to play more of a role in remedying that, is evidence on the face of things that somebody needs to be willing to stand up to the Chinese and talk about this issue. So, you don’t hear a lot of public applause for the American position on this, but it’s not as if the US is totally out on a limb by itself here.

Werman: Daniel Rosen, a partner at the Rhodium Group, an economic advisory firm, and a visiting fellow at the Peterson Institute for International Economics. Thanks very much.

Rosen: Marco, thank you.

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