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Morici on China's announcement to widen the daily trading range of the yuan
Howard Richman, 4/17/2012

In a commentary in the Boston Herald (Posturing aside, yuan undervalued), U. of Maryland economist Peter Morici pointed out that China's decision to widen the daily trading range of the yuan means little. He wrote:

Beijing announced Sunday it was widening the daily trading range for the yuan to 1 percentage point. This news has been heralded as another indication that China is liberalizing its currency, and the yuan may now be fairly valued.

This may be dead wrong.

In May 2007, when no one would dispute the yuan was undervalued by a wide range — by my reckoning, 40 percent — China widened the trading range to 0.5 from 0.3 percent to no real effect.

Theoretically, if market pressures require, the new band should permit the currency to appreciate or depreciate 1 percent daily, but in the past official intervention has frustrated this process.

As Morici points out, China's interventions in currency markets are the real culprit here, not China's peg to the dollar. China prints yuan to buy hundreds of billions of dollars each year in order to keep the dollar's exchange rate high and the yuan's exchange rate low so that Chinese products can artificially undersell U.S. products in world markets.

Nevertheless, the Obama administration hailed the move as a step in the right direction. The India edition of the Wall Street Journal reported:

The White House sees the widening as a positive action, said Ben Rhodes, the deputy national security adviser for strategic communication, who added the administration is closely reviewing the move.

"We've pressed the Chinese to take additional steps to appreciate their currency…They've made some progress. We'd like to see more movement," he said in Cartagena, Colombia, where President Barack Obama is attending a regional summit. "It comes in the continuum of us wanting to see the Chinese take more of these steps to see their currency appreciating…to market value."

A Treasury Department official said that China's move "could contribute to rebalancing, which would be positive for China, the United States, and the global economy." But the official, who requested anonymity, added that "the process of correcting the misalignment of China's exchange rate remains incomplete, and further progress is needed."

The Obama administration pretends that it is making progress in its dealing with China's trade cheating. Nothing could be further from the truth.

President Obama lets the Chinese government engage in currency manipulations. He lets the Chinese government delay sales of legitimate American DVDs, CDs and computer software while freely permitting their piracy. He lets the Chinese government place tariffs of about 25% on American vehicles of all sorts. He lets the Chinese government place high tariffs on U.S. meat. He lets the Chinese government exclude American products from government procurement catalogs.

Meanwhile, almost all of the emerging market countries are copying China's successful development strategy. Even Mexico and South Korea, two countries which we have "free trade" agreements, are engaging in massive currency market interventions. In fact, President Obama renegotiated the South Korea agreement without requiring that a balanced trade clause be inserted.

President Obama's failure assures that the 5 million manufacturing jobs lost to the U.S. trade deficits do not come back. The workers who lost these jobs were forced into less-productive jobs or into unemployment. The result was falling median American income during the G.W. Bush and Obama presidencies.

President Obama could end all of this trade cheating simply by invoking the WTO rule, invoked by President Nixon to balance trade in 1971, which lets trade deficit countries impose import restrictions or duties to balance trade. Obama could impose a scaled tariff upon all those countries which run trade surpluses with the United States.

But the Obama administration would rather pretend that it can solve the increasing income disparity, that it is itself producing, by raising taxes on the rich. Such taxes would likely reduce business investment, further reducing the wages of the American worker.

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