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

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Congress and the Bush administration continue to pressure Chinato allow its currency to appreciate against the U.S. dollar underthreat of trade sanctions. Critics contend "currency manipulation"gives Chinese producers an unfair advantage against their Americancompetitors by making Chinese imports artificially cheap and U.S.exports to China more expensive, thus depressing U.S. manufacturingoutput and destroying U.S. jobs.

The rationale behind China's currency policies and the impact ofthose policies on the U.S. economy are in reality quite differentfrom those claims.No precise or commonly accepted definition ofcurrency manipulation exists. China is among the one-half of IMFmembers, including most developing countries, that fix theircurrencies, and its central bank is moving toward a more flexiblecurrency.

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

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

Imposing punitive, unilateral sanctions against imports fromChina because of its foreign currency regime would be a colossalpolicy blunder. Trade sanctions would, of course, hurt producersand workers in China, but they would also punish millions ofAmerican consumers through higher prices, disrupt supply chainsthroughout East Asia, invite retaliation, and jeopardize sales andprofits for thousands of U.S. companies now doing business with thepeople of China.

Daniel Griswold

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