Senate Moves To 'Punish' China On Currency Policies

The Hill

The Senate voted Monday to advance legislation pressuring the Chinese government to stop undervaluing its currency, a practice most economists agree is giving the country an unfair trade advantage and is costing the U.S. jobs.

The Senate voted 79-19 to end debate on a motion to proceed to the bill, the Currency Exchange Rate Oversight Reform Act of 2011. While the vote does not mean the bill has passed, the strong show of support suggests it could well be approved in the upper chamber by the week’s end. Passage through the House is less clear, however, and GOP leaders have given no indication they will move forward with it.

It’s about time. My thoughts on this has not changed.

Let us suppose you are live in country A, and you wanted to buy a *200 dollar suit that country B made. However, the actual exchange rate from your currency to country B’s currency makes the suit more like *400. You still want the suit and decided to purchase it that weekend. In the meantime though your currency dipped further until finally the actual price in your currency is more like *450. That is devaluation because your currency wasn’t worth what it was just a few days ago even though the suit is still actually *200 back in country B.

Now you are faced with some choices, 1) fork over the money and buy it anyway, 2) Just buy the equivalent suit made in your own country for *200, or 3) forget about the purchase altogether.

What actually happens is more people take the second option and more suits made in country A are sold than made and exported from country B. As a result, more jobs are protected and industry secure in country A because everyone did the right thing and “bought from country A.” Since fewer goods from country B are sold, the job situation grows worse and the economy retracts. Export companies in country B cannot do was well as they would have before the devaluation of country A’s currency. Then, of course, the accumulation of this process drastically shifts the trade balance towards country A and puts country B at a disadvantage.

Obviously changes in the value of a state’s currency can have substantial impacts on the employment rate and a state’s trade balance vis-a-vis other states. At this point it is easy to see that country A is China and country B is the U.S. and none of this should be mistaken for macroeconomics. Because this is purposeful and political it falls under the category of international political economy.

In 2006, it was announced that the U.S. total trade deficit was $800 billion with the open acknowledgment that number was sure to grow because of our steady need of oil imports. Budget deficits affect a country’s prosperity and, ultimately, its power and influence internationally. In our increasingly interconnected global market, financial interactions can even threaten the sovereignty of a nation. Therefore, China’s purposeful manipulation of its currency is really an international monetary relation that affects all nations in the WTO and the greater community of free trading nations that rely on reciprocity to maintain cooperation.

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