The recent Chinese government devaluation of its currency by approximately 4.4 percent is a cogent reminder of how the Chinese manipulate their economy, and the world economy. There is no doubt that what the Chinese are doing is an effort to make these exports less expensive, which has been blatantly confirmed by senior leaders. These actions continue a decades-long attack on US manufacturing with little or no negative consequences.
Many countries have devalued their currency in times of crisis: Black Wednesday in Great Britain, the 1997 Asian Crisis, Argentina in 2002 and 2014, and Mexico in 1994. World economic organizations recognize such actions as a legitimate act of a sovereign. The Chinese, on the other hand, are engaging in a classic competitive devaluation, a term coined (pun intended) by economist Ted Truman. The Chinese face no crisis other than slowed growth and saving face.
The first step in understanding currency manipulation is to recognize that in Western economies, the government does not control the exchange rate; rather, it is set by the marketplace. In China and many other economies, the government sets the exchange rate. This creates fertile ground for the unfair manipulation of exchange rates, and in the case of the Chinese it has gone on for at least 20 or 30 years. As an aside, Trans Pacific Partnership does not, in my view, address currency manipulation in any meaningful fashion.
Chinese exports have grown to slightly over two trillion dollars, including 340 billion to the US in recent years. The impact of a 4.4 percent reduction in exchange rates creates an $88 billion dollar reduction in selling price, which is quite an incentive to the Chinese, as it dramatically increases profits in China. Will this be sufficient to quell further manipulation, if the Chinese economy sinks further?
The Chinese government included in their announcement of the devaluation on August 12, 2015, that they would make greater efforts to allow their currency to float based upon the market, but then retrenched by saying that while they would loosen their grip, they would not end it. There is little reason to believe that currency manipulation will not continue, when it benefits the Chinese government. It has cost millions of jobs in the United States, Canada and Western Europe. It has produced inferior products to what could have been produced at home, but products produced at home clearly cost more. The public, in large measure, has been unwilling to pay the additional cost because they do not see a direct connection between paying a somewhat higher price and maintaining US jobs.
The fault lies with virtually every administration since China emerged as a cheap manufacturing center, with global corporations, and with the American public. Buying goods made in North America would have much greater impact than the public recognizes.
There are a number of bills that have been reintroduced recently, or will soon be introduced, that provide for the raising of tariffs on Chinese goods. A bipartisan effort, led by Representative Tim Ryan, Debbie Dingell, and Candice Miller, along with Senators Chuck Schumer and Rob Portman, among others, supports legislation to address the use of competitive devaluation.
It is clearly time for the administration, Congress, corporate America and the American people to stand up and take strong action against the Chinese, by imposing a tariff equal to any reduction in the Chinese currency exchange rate, and bolster the American public’s willingness to pay higher prices for goods made by families and friends.
This article was previously published in The Hill on August 18, 2015.
Mr. Owens is a former member of Congress representing the New York 23rd, a strategic advisor at Dentons out of its Washington, DC, office, and a partner in the firm of Stafford, Owens, Piller, Murnane, Kelleher & Trombley, PLLC, in Plattsburgh, New York.
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