The intersection of diplomacy and fiscal policy can be a bit like Alice strolling from Wonderland into George Orwell’s “1984.” The latest example is the U.S. Treasury Department’s continuing refusal to label China as a “currency manipulator,” even though everyone knows that they are.
From a Bloomberg News report:
China isn???t a currency manipulator under U.S. law, though the yuan ???remains significantly undervalued??? and needs to rise further, the Treasury Department said.
China ???has substantially reduced the level of official intervention in exchange markets since the third quarter of 2011,??? the Treasury said in a statement accompanying its semi- annual currency report to Congress yesterday. The yuan has gained 9.3 percent in nominal terms and 12.6 percent in real terms against the dollar since June 2010, the Treasury said.
???It appears that the strategy of the last two administrations to use diplomacy rather than confrontation in dealing with the yuan???s value is having some positive results,??? William Reinsch, president of the National Foreign Trade Council, a Washington-based business group, said in an e-mail after the report. ???There is clearly room for further appreciation, however.???
In declining to brand China a manipulator, the Treasury cited the reduced intervention and ???steps to liberalize controls on capital movements, as part of a broader plan to move to a more flexible exchange-rate regime.??? The U.S. hasn???t designated another nation since 1994, when it named China.
Got that? China’s not a currency manipulator, but they deserve congratulations for manipulating their currency a bit less than they used to.
Say what you will about Senator Chuck Schumer’s (D-NY) ability to dispense B.S., but he knows it when he smells it. ???This report all but admits China???s currency is being manipulated, but stops short of saying so explicitly,??? Schumer said of the Treasury decision. ???The formal designation matters because there can be no penalties without it. It???s time for the Obama administration to rip off the Band-Aid, and force China to play by the same rules as all other countries.???
The Hill relays a few more disappointed reactions from both sides of the aisle:
???Unfortunately, this is no surprise,” said Sen. Rob Portman (R-Ohio).
“The Obama administration has refused to take on China???s currency manipulation eight times. During this time of anemic economic growth, record-setting national debt and stubbornly high unemployment, we cannot afford to sit idly by as China refuses to play by the rules.???
Democratic Sen. Bob Casey (Pa.) said the report makes it clear that China is “cheating on its currency and stealing American jobs.”
“However, once again, the administration failed to act,” he said.
“The news that China is playing games with its currency should come as no surprise, but it should serve as a call to the Administration to finally label China a currency manipulator.”
Sen. Orrin Hatch (R-Utah), the top Republican on the Senate Finance Committee, criticized the administration for not only failing to miss the deadline for the report “they???ve added insult to injury by failing to take it seriously.”
“Given our large and growing trade imbalance with China, it is simply inexcusable for the White House to continually shirk its statutory obligations and refuse to take this issue head on,” he said.
“The economic problems our country faces demand strong Presidential leadership. Ignoring critical trade issues and issuing late reports that are simply more of the same are a poor substitute.???
The non-confrontational, diplomatic approach to bringing up the value of the yen is favored by large American corporations that do business in China. As the Treasury report notes, this approach has been slowly bringing results. Critics of China’s monetary policy, like Schumer and 2012 presidential candidate Mitt Romney, say it’s not working fast enough, and the cost to domestic business concerns has already been enormous. Some estimates say China’s trade policies have already cost almost 3 million American jobs over the course of the past decade, better than half of them in the manufacturing sector. During the campaign, Romney said he’d officially label China a currency manipulator on his very first day in office. Oddly enough, this new Treasury report was supposed to come out in October, but it was delayed until after the election. What an interesting coincidence.
There is a case to be made that the non-confrontational approach has been going on for so long, through both Republican and Democrat administrations, that changing course now would be rather pointless. China’s most likely response to official designation as a currency manipulator would be “How dare you!” followed by “What are you going to do about it?” The answer to the latter question would be tariffs and other penalties, which would result in China slapping down some tariffs of their own. Barack Obama’s weak, high-unemployment economy is not well positioned to triumph in such a showdown. The American market is vast, powerful, and desirable, but it’s already overtaxed by the demands of the American government.
And let’s be honest: just about every government on Earth manipulates its currency, most definitely including ours. Monetary policy has been helping to prop up Washington’s fiscal policies for a long time. “Quantitative easing” was expressly designed to weaken the dollar enough to attract foreign trade and investment. It’s all a matter of degree, and beneath the doublespeak of Treasury’s official report lies a decision to lower some very flexible standards just enough to create a new reality, in which Beijing is praised for doing less of what Treasury says it’s not doing.
The Chinese have already plowed so much money into the insolvent U.S. government that they can reasonably expect a certain degree of deference. American officials are allowed the odd squeak of outrage, as when China moved to gobble up all that Canadian oil Barack Obama left on the table when he killed the Keystone XL pipeline, but as long as official policy – which, as Schumer and Romney have noted, can carry very tangible penalties – remains amenable, Beijing will keep floating us loans to pay for the food-stamp program. At least, they will for a few more years.