Why the US shouldn’t pressure China on currency issues

US-Chinese relations have been rocky at best and outright hostile at times. The Chinese got pissed of at the US’s decision to sell military arms to Taiwan and then at Obama’s meeting with the Dalai Lama. Then there was the row over censorship in the wake of Google’s pull out. The latest spat has been over China’s supposedly undervalued currency. To be fair, there is an almost unanimous international consensus that the RMB is undervalued. This however is irrelevant. Regardless of this, the US should not be trying to pressure China for a RMB rise.

First, those who are calling for the move are hardly reliable. Sure, they have their share of Nobel economists and awards. But muddled amongst their claims were that China and Hong Kong were both currency manipulators. C. Fred Bergsten, director of the Peterson Institute for International Economics, a think-tank in United States said in a Congress hearing that

“Several neighboring Asian countries of considerable economic significance — Hong Kong, Malaysia, Singapore and Taiwan — maintain currency undervaluations of roughly the same magnitude in order to avoid losing competitive position to China.”

True, Hong Kong has a peg to the USD since 1983, and the government has had to control the currency to maintain that peg, but maintaining a peg is hardly currency manipulation. And if a peg is to be maintained, its rather difficult to manipulate a pegged currency! The total irony of it all is that Treasury Secretary Timothy Geithner paid a visit to Donald Tsang and other prominent financial people during his stopover in Hong Kong just this week. The HKD-USD peg has been around for almost 30 years, as long as Bergsten has been out of the government and out of touch with reality. John Tsang, Financial Secretary of Hong Kong put it quite nicely :

“This is a sign of rising protectionism and this kind of absurd voice will continue to be heard. Hong Kong’s peg to the U.S. dollar has been in effect for over two decades, how could we have manipulated our currency in that period?”

Even if we assume their claims are correct, what’s the real problem? Is the US-China trade imbalance a result of currency manipulation or a more fundamental issue with the US economy? Understandably, the currency plays a part, but the underlying problem is not the RMB but the lost of competitiveness of US products. Made in US just isn’t that cool or in demand anymore. US goods are expensive in comparison to almost all countries, that’s the underlying problem. Changing the RMB value won’t change the price of US products. Until something is done, the trade imbalance will still occur.

There really is no better indicator of the US’s lack of competitiveness than the fact that a trade imbalance would occur even if the RMB raised its value. Many Chinese goods would still be cheaper than US goods. Even if they aren’t US goods won’t be the cheapest because Indonesia, South east Asia, India, Brazil and other countries will still be cheaper than Made in US. In fact, Saudi Arabia’s multilateral merchandise surplus of $212bn in 2008 dwarfs China’s $175bn surplus. Has the US cried about Saudi Arabia? No. It wants the oil. Would RMB revaluation do anything to the Saudi Arabian surplus? No. What does Bergsten want to do then? Ban all foreign goods?