Its not about the money

Oct. 26, 2011
China's currency manipulation is different in scale, not in substance, from more familiar government policy techniquies

It is almost an article of faith among U.S. manufacturers, including most metalcasters I’ve known, that they are the victims of a sustained program of currency manipulation by China, which they assert devalues its own currency in order to keep prices for its exports cheaper than comparable goods produced here. In October, manufacturers had their point reiterated when the U.S. Senate approved legislation that would punish Chinese exporters by allowing domestic manufacturers to seek excise duties against their shipments if it can be proven that the goods in question have benefited from subsidies.

The bill has almost no chance of becoming law, because the U.S. House, the President, and his Treasury and Commerce appointees are practically unanimous in predicting that bill’s punitive import duties would initiate a trade war with China. In general, this impasse has been ongoing for most of the past decade: there’s a lot of outrage about the circumstances and only a little will to take action to address what seems to be a profoundly serious allegation.

Why that is so is an important issue, but to deal with the allegation let me say that I believe it’s true. China is an excruciatingly regulated economy. The regulators are political elites who realize they must maximize wealth creation for a very large but still underdeveloped nation with a vast population that must be kept reasonably contented to address the very real prospect of civil unrest, or even revolution.

But, to say that China is “manipulating” currency is misleading: financial regulators there are not standing behind tellers’ windows, commanding clerks to charge a little bit more or less in exchange rates as a way to maintain an advantage over the nations importing their products. They are manipulating in a more fundamental way – using (on a wide, sustained scale) the same techniques that financial regulators and political leaders worldwide employ to effect their financial policies.

China’s primary technique for manipulating its currency is subsidizing its preferred businesses, which by twists and turns are owned by the state in any case. These state-owned enterprises have a level of financial support and regulatory leeway that their competitors find impossible to overcome. Various policies are implemented or ignored, as needed, allowing state-owned enterprises to survive despite mismanagement, environmental or labor violations, and financial irregularities.

Moreover, because these state-owned companies drive revenue to the government, and support the policies and prosperity of the officials overseeing them, they really cannot fail. In addition to direct subsidies, they frequently have access to artificially low interest rates from banks, which also are government-owned. Companies that are not state-owned, both domestic and foreign firms, must maintain a rigorous compliance with regulations on investments, profits, production, and distribution. They can’t keep up.

China’s techniques are different in scale but not in substance from the methods used by financial regulators in the U.S., in the European Union, or anywhere that a central bank oversees money supply and government officials set financial regulations. They buy and sell each others’ debts to insure their own risks. They lower interest rates to encourage capital spending, or raise interest rates to contain inflation. They issue tax credits to encourage investment, or even purchases, in the areas or markets or industries they favor. They make direct investments in private corporations identified as vital, or even “promising.”

The reason that the charge of manipulation sticks on China is that it comports with the broader understanding we have of that government’s policies: exploiting workers to justify its imperative for growth, and repressing citizens to validate its claim to promoting peace and prosperity.

I doubt that a wide pursuit of tariffs would undo all this. Whether it would lead to a trade war is beyond my forecasting ability, but it’s sure to drive up U.S. consumer prices and that would do no good for domestic manufacturers.

Supporters of the legislation insist they are sending a message to China, and there’s no harm in that. Perhaps that message would have some bargaining advantage in future trade negotiations. But, the first goal in negotiation is to overcome the opposite party’s highest objective, and a close look makes clear what that is for China.

Negotiators also have to be willing to sacrifice some of their own principles. Manufacturers and others would do well to examine why U.S. officials have so little will to address China’s manipulation, and the advantages to them of maintaining their own manipulative measures.