Trade Briefing Paper No. 23

Who’s Manipulating Whom? China’s Currency and the U.S. Economy

By Daniel Griswold
July 11, 2006

Congress and the Bush administration continue to pressure China to allow its currency to appreciate against the U.S. dollar under threat of trade sanctions. Critics contend “currency manipulation” gives Chinese producers an unfair advantage against their American competitors by making Chinese imports artificially cheap and U.S. exports to China more expensive, thus depressing U.S. manufacturing output and destroying U.S. jobs.

The rationale behind China’s currency policies and the impact of those policies on the U.S. economy are in reality quite different from those claims.No precise or commonly accepted definition of currency manipulation exists. China is among the one-half of IMF members, including most developing countries, that fix their currencies, and its central bank is moving toward a more flexible currency.

Despite their rapid increase, imports from China have not been a major cause of job losses in the U.S. economy. Real output of U.S. factories has actually increased by 50 percent since China fixed its currency in 1994. Rising imports from China have not so much replaced domestic production in the United States as they have imports that used to come from other lower-wage countries.

Critics overlook the huge benefits to Americans from trade with China.Most of what we import from China fits in the category of consumer goods that improve the lives of millions of Americans every day at home and in the office. China is now a major market for U.S. companies and an important source of capital for the U.S. economy.

Imposing punitive, unilateral sanctions against imports from China because of its foreign currency regime would be a colossal policy blunder. Trade sanctions would, of course, hurt producers and workers in China, but they would also punish millions of American consumers through higher prices, disrupt supply chains throughout East Asia, invite retaliation, and jeopardize sales and profits for thousands of U.S. companies now doing business with the people of China.

Read the Full Trade Briefing Paper

Daniel Griswold is the director of the Cato Institute’s Center for Trade Policy Studies.