U.S. Backs Off in Currency Dispute with China

The U.S. Treasury Department has postponed its announcement on whether China is a currency manipulator. From Reuters:

The Obama administration backed away on Friday from a showdown with Beijing over the value of China’s currency that would have caused new frictions between the world’s only superpower and its largest creditor.

The Treasury Department delayed a much-anticipated decision on whether to label China as a currency manipulator until after the U.S. congressional elections on November 2 and a Group of 20 leaders summit in South Korea on November 11.

Washington and the European Union accuse China — set to become the world’s second-largest economy after the United States this year — of keeping the yuan artificially low to boost exports, undermining jobs and competitiveness in Western economies.

James Fallows weighs in at his Atlantic blog:

Many, many notes from Chinese readers, and some from Americans too, have included an assertion like this one (from a person with a Chinese name): “If I’m not mistaken, the goal of forcing the value of RMB up is to increase the american export [to China].”

Let me put this tactfully: NO NO NO NO NO NO NO. As I’ve tried to argue over the years – for instance here, here, here — this isn’t the problem, and for that problem (American exports and jobs) whatever the RMB does will not necessarily be the solution.

The problem for the world’s economies is chronic imbalance: too much production, reliance on exports, over-investment (yes, it’s possible) and under-consumption in some countries, mostly China; and too much consumption, reliance on debt and imports, and over-consumption, in some other countries, mostly the US. You can’t and don’t balance those accounts on a purely bilateral basis — mandating that America sell more to China, and China less to the US. That’s like thinking you lose weight by just concentrating on what you have for lunch. You balance them by ensuring, overall, that China’s economy comes into a less distorted relationship with the rest of the world’s — and America’s, from its opposite type of distortion, does too.


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