Moment of Truth for the US-China Currency Debate
September 29, 2010
Stephen S. Roach Morgan Stanley Asia
On September 29, the US House of Representatives passed legislation that would allow trade sanctions to be imposed onChina as compensation for its supposedly undervalued currency. This vote comes aweek after President Obama, in a private meeting with Prime Minister Wen Jiabao,was reported to have made it very clear that the United States is, indeed, prepared to take forceful actions if China doesn’t budge onthis critical issue. Unfortunately, forcing sucha currency realignment would be a blunder of historic proportions.
In a recent meeting with Mr. Wen in New York, I ramedthe dispute between our two nations in a very dierentlight. he gist o what I told him is this: he economictensions between the United States and China arise becauseo two things we have in common.
By passing a trade sanctions bill, the US Houseof Representatives has seriously upped the anteon China bashing.
First, there is our shared ixation on jobs. In theUnited States, we continue to struggle with high rateso unemployment and underemployment. In China,policymakers continue to worry about what they term“social stability”—that is, ull employment, absorption o surplus rural labor and reduced inequalities consistent withtheir aspirations or a “harmonious society.”Second, or both China and the United States, there aremajor imbalances in the percentages o gross domesticproduct devoted to exports, investment, consumptionand savings.hese joint concerns have resulted in serious tensions thatmust be resolved. here are, however, two very dierentpotential strategies to address these tensions: a majorcurrency realignment, avored by many in the UnitedStates, or structural policies aimed at increasing China’sinternal private consumption.he currency ix won’t work. At best, it is a circuitoussolution that would address only one o the many pressuresshaping the imbalances between our two nations; at worst,it would lead to a trade war, or risk jeopardizing China’sunderstandable ocus on inancial and economic stability.
The economics of the so-called currency xare awed—there is no bi-lateral remedy for a
Besides, in a highly competitive world, there are noguarantees that currency shits would be passed throughto oreign customers in the orm o price adjustments thatmight narrow trade imbalances. Similar ixes certainly didn’t work or Japan in the late 1980s, and haven’t worked or theUnited States in recent years. We’ve allowed the dollar toall 23 percent—in inlation-adjusted terms—rom its early 2002 peak, against all o our trading partners; we did thisin the hopes that a weaker dollar would stimulate exportsand domestic production. Yet America continues to struggle with high unemployment and stagnant wages, and now hastrade deicits with 90 countries around the world.his latter point underscores the danger in politicizingthis debate. Contrary to accepted wisdom, America doesnot have a bilateral trade problem with China—it has amultilateral trade problem with a broad cross-sectiono countries. And why do we have these deicits? Because Americansdon’t save. Adjusted or depreciation, America’s net nationalsaving rate—the sum o savings by individuals, businessesand the government sector—ell below zero in 2008 and
This article was published in the Opinions Page in the
New York Times
on September 28, 2010 under the original title of “Cultivating the Chinese Consumer.”