The yuan and trade

Remember when Tim Geithner caused a big hubbub when he called China a currency manipulator? I guess he doesn’t think so any more.

I think the whole currency manipulation issue should be put on the back burner for a while. In the midst of a massive global economic downturn we don’t need another reason for either country to go on a populist bonanza. Secretary Geitner is correct to point out that China has been very cooperative about the economy and has delivered a huge stimulus package. A whole lot more than our European allies have contributed.

As for the manufacturers who blame Chinese currency manipulation for the massive US trade deficit, you might want to look at the structural issues of the Sino-American relationship. “Chimerica” works like this: The United States government LOVES to cut taxes but still provides important governmental services for its citizens (like, say, pirate – killing snipers). So the Federal government runs a budget deficit and needs someone to buy American debt. China, with its rapidly growing economy and desire for foreign exchange reserves, steps in and buys a large chunk of the Treasury offerings. The increased demand for US dollars makes the yuan weak compared to the green back and now Chinese goods are less expensive than before. Considering that the cost of producing is much lower even without the favorable exchange rate, you get lots of Chinese imports to America.

So instead of complaining about currency manipulation maybe manufacturers should be vote for candidates who promise to decrease the budget deficit or the implementation of a new global reserve currency (creates less demand for the dollar and US debt).  Either way, they’ll be happy to know the trade deficit is rapidly decreasing.

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