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Why We Should Thank the Chinese Currency Manipulators

Yes, China manipulates its currency, but it’s a form of generous foreign aid to Americans

By Mark J. Perry

At a recent event hosted by The Aspen Institute,"Is U.S. Trade Policy Helping or Hurting Manufacturing?" and featuring former U.S. Trade Representative Susan Schwab and former principal economic adviser to Vice President Joseph Biden Jared Bernstein, there was a lively debate on a number of issues relating to trade and manufacturing. While there were differences of opinion on most topics, there was a strong consensus (including among the attendees) on one topic: China is a currency manipulator. Here is a summary of that consensus, as I understand it:

1. China manipulates its currency by keeping the yuan undervalued and the dollar overvalued.

2. That currency manipulation gives China an economic advantage that harms the United States.

3. The United States and other countries should individually or collectively take steps to persuade or force China to stop its manipulation.

4. Solutions to China’s currency manipulation range from direct legislation, like the bill passed recently in the Senate that will impose stiff tariffs on Chinese goods if the Treasury finds evidence of currency manipulation, to other forms of indirect pressure on China to persuade it to stop manipulating its currency.

Let me break from that consensus about China’s currency policy and present an alternative position:

In the best of all possible worlds for the United States, China would use its labor and capital to manufacture consumer products like clothing, footwear, furniture, electronics, and appliances and send $300 billion worth of these products to U.S. consumers for free every year as a gift or a form of foreign aid to the American people. In addition, the Chinese would produce and send to America another $100 billion worth of raw materials, parts, industrial supplies, inputs, and natural resources at no charge, as a gift to American manufacturers every year. (Note: That’s roughly the amount of goods we will purchase from China this year.)

Can there really be any argument that such an arrangement, where America would receive $400 billion worth of free goods every year from China, would be to the unquestionable economic advantage of the United States? Unfortunately, that extreme Chinese generosity is not realistic, so here's a possible second-best outcome:

Instead of sending us $400 billion worth of goods annually for free, China offers an attractive alternative. It agrees to send us $500 billion worth of consumer and industrial goods every year, but agrees to sell us those manufactured goods at a substantial 20 percent discount for only $400 billion. In that case, the amount of foreign aid will be less than the $400 billion in the first example, but will still be significant—a $100 billion gift every year from the Chinese people to the American people.

How will China generate this $100 billion in annual foreign aid to the United States? One way is to keep its currency undervalued to bring about the 20 percent discount on its products coming to America.

Which then raises the question: If China is willing to undervalue its currency, and in the process provide approximately $100 billion of foreign aid annually to American consumers and businesses, what’s the problem? Why should we complain?

And that is my main point: that the "manipulation" of China's currency is actually to the distinct advantage of millions of American consumers (especially low-income Americans) and U.S. businesses buying products made in China. Those two groups certainly aren't complaining about low-priced Chinese products, and in fact would be made worse off if China were forced to revalue its currency and in the process make its products more expensive for Americans.

So if neither American consumers nor U.S. import-buying businesses would benefit from a stronger yuan and a reduction in China's "foreign aid" to America, who would really benefit? The same group that always benefits from protectionist, mercantilist trade policies: domestic producers who compete against foreign rivals in China and elsewhere.

We know from economic theory and empirical evidence that protectionist tariffs produce benefits for domestic producers, but also higher costs for domestic consumers. Unfortunately, the costs to consumers from protectionism are greater than the benefits to producers, resulting in a net economic loss for the country and a reduction in its standard of living.

Likewise, forcing China to appreciate its currency would be equivalent to a protectionist tariff on Chinese goods and would make American consumers, import-buying companies, and the country as a whole worse off.

So when you hear discussion of China’s currency manipulation, keep the following in mind:

1. China's currency manipulation is a form of foreign aid, and to the direct advantage of millions of U.S. consumers, especially low-income groups, and to the direct advantage of thousands of American companies buying inputs from China.

2. Forcing China to revalue its currency would benefit some American manufacturers competing with China, but would significantly harm those American consumers and businesses currently buying undervalued imports. On net, there would be more harm to American consumers than benefits to American manufacturers, which would reduce our overall standard of living.

3. Like other forms of mercantilism and protectionism, forcing or pressuring China to appreciate its currency would favor certain domestic producers over millions of consumers and import-buying companies, but would make the United States worse off, not better off.

4. Finally, instead of complaining, we should be thankful for China's foreign aid to Americans through an undervalued yuan, overvalued dollar, and undervalued goods that collectively save American consumers and companies billions of dollars every year.

Bottom Line: If you wouldn't object to China sending products to the United States for free, then on what basis would you object to currency “manipulation” that allows you to purchase undervalued Chinese imports at a huge discount and great bargain?