Krugman: American Policymakers Must Deal With China's Currency Manipulation

Paul Krugman weighs in on China’s continued policy of devaluing its currency to promote exports:

Senior monetary officials usually talk in code. So when Ben Bernanke, the Federal Reserve chairman, spoke recently about Asia, international imbalances and the financial crisis, he didn’t specifically criticize China’s outrageous currency policy.

But he didn’t have to: everyone got the subtext. China’s bad behavior is posing a growing threat to the rest of the world economy. The only question now is what the world — and, in particular, the United States — will do about it.

China has been keeping its currency pegged to the dollar — which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.

And that’s a particularly bad thing to do at a time when the world economy remains deeply depressed due to inadequate overall demand. By pursuing a weak-currency policy, China is siphoning some of that inadequate demand away from other nations, which is hurting growth almost everywhere. The biggest victims, by the way, are probably workers in other poor countries. In normal times, I’d be among the first to reject claims that China is stealing other peoples’ jobs, but right now it’s the simple truth.

So what are we going to do?

U.S. officials have been extremely cautious about confronting the China problem, to such an extent that last week the Treasury Department, while expressing “concerns,” certified in a required report to Congress that China is not — repeat not — manipulating its currency. They’re kidding, right?

The thing is, right now this caution makes little sense. Suppose the Chinese were to do what Wall Street and Washington seem to fear and start selling some of their dollar hoard. Under current conditions, this would actually help the U.S. economy by making our exports more competitive.

In fact, some countries, most notably Switzerland, have been trying to support their economies by selling their own currencies on the foreign exchange market. The United States, mainly for diplomatic reasons, can’t do this; but if the Chinese decide to do it on our behalf, we should send them a thank-you note.

The point is that with the world economy still in a precarious state, beggar-thy-neighbor policies by major players can’t be tolerated. Something must be done about China’s currency.

Krugman makes an important point about beggaring thy neighbor policies on the part of major powers being unacceptable. In addition, they generally backfire. In this case, as domestic American frustration over China’s role in the global economy grows, the prospect grows of the American government taking major actions that affect China’s ability to prosper. (Which will in turn likely result in Chinese retaliation.) 

We’ve already seen a small step in this direction with the tire tariff spat, but if Americans begin to feel that China is a bad actor in the global economy – even though, as Krugman writes, most of the jobs impact is still being felt in other poor countries – both the United States and China will have tremendous problems on their hands. For China, modernity and prosperity rests on fully joining the global economic system, which means starting to better play by the rules; American policymakers face the challenge of convincing China of that.