Larry Summers, Director of the National Economic Council, returned empty handed from meetings this week with Chinese President Hu Jintao and other senior government officials. Although China announced in June that it would allow its currency to fluctuate, the yuan has gained less than one half of one percent since then. Summers was officially rebuffed by a spokeswoman for China's Foreign Ministry, who said, "Our exchange rate reform can't be pressed ahead under external pressure." Time has run out on negotiations. The House Ways and Means and the Senate Banking, Housing and Urban Affairs Committees will both hold hearings next week on China currency and will consider tough legislation such as Congressman Tim Ryan and Tim Murphy's Currency Reform for Fair Trade Act (HR 2378) and similar legislation introduced by Senators Chuck Schumer and Lindsay Graham.
Currency manipulation by China and several other Asian nations makes their goods artificially cheap and makes U.S. exports artificially expensive in China and in world markets. Chinese foreign exchange reserves, the main instrument of currency manipulation, reached an unprecedented $2.5 trillion this past June. The Chinese yuan or Renminbi (RMB) is estimated to be at least 35% to 40% undervalued, relative to the U.S. dollar. With no change in exchange rates and the growth of illegal subsidies and other unfair trade practices, it is no surprise that structural imbalances in trade and capital flows are resurfacing as the global economy recovers from the worst recession in 70 years. The growth of the U.S. trade deficit with China between 2001 and 2008 eliminated 2.4 million U.S. jobs; Ending currency manipulation now could create at least one million badly needed jobs.
Summers and Treasury Secretary Timothy Geithner have been pleading for more time since last April, when Treasury announced the delay of a Congressionally mandated report on currency manipulation. Treasury wanted more time for bilateral Strategic and Economic Security Dialogue (S&ED) meetings, for the G-20 meeting and for Summer's trip this week with Thomas E. Donilon, Deputy National Security Advisor. Treasury officially refused to admit the obvious, that China's currency is 35-40% undervalued and is being manipulated; the currency report that was finally released on July 8 admitted that the data "suggest that the renminbi remains undervalued" but concluded that "no major trading partner of the United States" was manipulating its exchange rate. It was a laughable, failed attempt to deny the obvious elephant in the room: China is clearly manipulating its currency.
The failure of negotiations to bring about a significant revaluation of the RMB demonstrates that China will not change its policy unless and until it is confronted with the threat of real trade sanctions. If enacted, or even if approved by either chamber, the China currency measures currently under discussion in the House and Senate would send a strong message to both the Chinese government and the Obama administration. Congress could send an even stronger message by enacting an across-the-board restraint on imports from China and other currency manipulators, such as the Schumer-Graham currency measure of 2005, S. 295, which would have imposed trade sanctions if China failed to revalue. In 2005, 67 members of the Senate approved this legislation on a procedural vote. While S. 295 never became law, that summer China did allow its currency to float, and it rose 20% over the next three years. China has shown that it will not allow its currency to rise significantly unless Congress or the administration gets tough. The Obama economic team has shown that it has no backbone. Congress should adopt tough, across the board currency sanctions now.