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Under current conditions of high
unemployment, an improvement of $50bn to $120bn in the US trade balance would
generate 300,000 to 700,000 new US jobs according to American economist Fred Bergsten.
About half of the new jobs would occur in manufacturing and pay wages well above
the national average.
is the director of the Peterson Institute for International Economics, a
Washington DC think-tank and a former Treasury official during the Carter
Administration, in congressional testimony on Wednesday said the
initiatives he was proposing to achieve the additional jobs outcome, would have
virtually zero budget cost. Hence he said, renminbi correction (and exchange
rate adjustment more broadly) must be one of the most cost-effective stimulus
measures now available to the US Government.
The economist said the US and Chinese global trade
imbalances are increasing sharply, which makes it considerably harder to reduce
unemployment and achieve a sustainable recovery in the United States. China's
currency remains substantially undervalued, importantly due to that country's
massive intervention in the foreign exchange markets, and is a major cause of
its large and growing trade surplus. It has risen by less than 1% since the
announcement of a "new policy" in June 2010. China let its exchange
rate rise by 20 to 25% during 2005–08. Bergsten said the goal should be to persuade it to permit a
similar increase over the next two to three years. This would reduce China's
global current account surplus by $350bn to $500bn and the US global current
account deficit by $50bn to $120bn.
Writing in the magazine
Foreign Affairs, Bergsten
said in 2009 that the
dollar’s position as the default international currency has made it “much
easier for the United States to finance, and thus run up, large trade and
current account deficits with the rest of the world.” But the US trade
deficit, along with the huge US budget deficit, laid the groundwork for the
current financial crisis. So he said it was time for Washington to realise that
“large external deficits, the dominance of the dollar, and the large capital
inflows that necessarily accompany deficits and currency dominance are no longer
in the United States’ national interest.” It was time to start creating an
international currency system that did not rely on the US dollar.
Testimony (pdf) before the Hearing on China’s Exchange Rate Policy,
Committee on Ways and Means, US House of Representatives
September 15, 2010
Summary and Recommendations
The US and Chinese global trade imbalances are increasing
sharply. This makes it considerably harder to reduce unemployment and
achieve a sustainable recovery in the United States.
China’s currency remains substantially undervalued,
importantly due to that country’s massive intervention in the foreign
exchange markets, and is a major cause of its large and growing trade
surplus. It has risen by less than 1% since the announcement of a "new
policy" in June 2010.
China let its exchange rate rise by 20 to 25% during
2005–08. Our goal should be to persuade it to permit a similar increase over
the next two to three years. This would reduce China’s global current
account surplus by $350bn to $500bn and the US global current account
deficit by $50bn to $120bn.
Elimination of the Chinese misalignment would create about
half a million US jobs, mainly in manufacturing and with above-average
wages, over the next couple of years. The budget cost of this effective
stimulus effort would be zero.
The United States should seek to mobilize a multilateral
coalition to press China to let its currency rise by the needed amount. The
European Union and a number of important emerging market economies,
including all three of the other BRICs, have expressed deep concern over
China’s currency policy.
This currency realignment is an integral part of the global
rebalancing strategy adopted by the G-20 and laid out in detail as part of
its new Mutual Assessment Process. This strategy has been agreed by the
Chinese (as well as all other) member governments. Further development and
implementation of the program is to be discussed, and hopefully adopted, at
the next G-20 summit in Korea in November.
To date, however, the efforts of the International Monetary
Fund (IMF) to persuade China to move sufficiently have largely failed. The
Fund has no enforcement tools of its own. Hence the United States and its
allies should seek authorization from the World Trade Organization (WTO) to
impose restrictions on imports from China unless it allows its currency to
To lead this effort credibly, the Administration must of
course designate China as a "currency manipulator," as it has been
for at least seven years. We can hardly ask the world, through the IMF and
WTO, to indict China if we are unwilling to do so ourselves. The Committee,
and the Congress more broadly, should insist that the Administration do
so—preferably at these hearings.
In addition, the Administration should initiate a new
strategy of "countervailing currency intervention" (CCI) against Chinese
purchases of dollars by making offsetting purchases of Chinese renminbi.
China has been intervening at an average of about $1bn per day over the past
several years, by purchasing dollars with renminbi to keep the price of our
currency up and the price of its currency down. This greatly enhances the
price competitiveness of Chinese products in world trade. The United
States should counter by buying corresponding amounts of renminbi with
dollars, which we can of course create without limit. This is
technically challenging, since the renminbi is not fully convertible, so our
authorities will have to find and buy market proxies such as nondeliverable
forward contracts for renminbi and renminbi-denominated bonds in Hong Kong.
The United States should also henceforth treat currencies
that are substantially and deliberately undervalued as constituting export
subsidies for purposes of calculating and applying countervailing duties
(but not antidumping duties). They clearly represent a subsidy (and an
equivalent import barrier) in economic terms and I believe the Department of
Commerce erred in its recent determination that they are not countervailable
under current US law. As a result of Commerce’s decision, however, I
recommend that Congress pass that part of the Ryan-Murphy bill (H.R. 2378)
that would clarify that currencies that are substantially and deliberately
undervalued are to be treated as export subsidies subject to US
John Kyriakopoulos, head of currency strategy at NAB Global Markets Research, says China recognizes that a stronger yuan is in its interest but what is deemed an appropriate pace of appreciation is another question. He talks to CNBC's Martin Soong and Sri Jegarajah: