Thursday, 18 March 2010 18:45
The following op-ed in today's Wall Street Journal titled "The Yuan Scapegoat" is a must read that offers an interesting take on the benefits of China's currency peg to the U.S. dollar.
http://online.wsj.com/article/SB10001424052748704743404575127511778280940.html
On March 15, 130 members (90 of them Democrats) of Congress sent a letter to Treasury Secretary Geithner urging Treasury to denounce China as a "currency manipulator" and to impose tariffs on Chinese goods. A full copy of the letter can be found here:
http://www.michaud.house.gov/index.php?option=com_content&task=view&id=969&Itemid=76
The authors of this letter cite weak economic conditions as reason to take action against China. It is precisely because of the fragility of the economic recovery that starting a protectionist trade war with China is a very bad idea. With all the parallels made between the recent economic crisis and the Great Depression, it would be very surprising to see us repeat the mistake of the Smoot-Hawley Tariff Act of 1930. After Smoot-Hawley, retailiatory tariffs reduced trade with our partners by half and exacerbated the Great Depression.
Please read the WSJ article. The op-ed reminds us that most global currencies were pegged after WWII through the early 1970s. Further, many countries continue to peg their currencies to the dollar, or in the case of Europe, to the euro. The article argues that the reason for a pegged currency is to achieve economic stability from stable exchange rates and makes the case that China has effectively outsourced monetary policy to the Federal Reserve. The article reminds us how important the peg to the dollar has been to China's growth and by extension how important China's growth is to the United States and to the rest of the global economy. Finally, the editorial recommends a more moderate course of action (a small revaluation of the yuan accompanied with currency convertability) that seems much more reasonable than the hard-line stance suggested by certain members of Congress.
After suffering through the worst economic crisis since the Great Depression, I have been flabbergasted by the policy response of our nation's leaders. To jump start our economy and create new jobs, the best they can come up with is an $800 billion, pork-ridden spending bill, a far-reaching overhaul of health care, allowing the Bush tax cuts to expire and now a potential trade war with China? You can't make this stuff up.