Nuanced Approach to Chinese Currency Conundrum Bears Fruit

While much of the debate surrounding the Obama administration’s decision to delay a Treasury Department report on China’s currency practices, has defined the decision as a trading China’s help with Iran for benefits to the American economy, the decision is mostly about effectively achieving revaluation of China's currency. The report, which might have (accurately) labeled China a currency manipulator, would have been another bump – this one likely fairly major – in the already strained U.S. – China relationship. Instead, the decision to pursue the currency issue through the G-20 and other diplomatic avenues should be seen not as a concession by the U.S. but rather as the more appropriate, intelligent, and ultimately effective means of pursuing necessary economic adjustment in a changing global economy.

While politically convenient and satisfying on some levels, declaring China a currency manipulator, thereby unleashing a set of political and legal actions, would likely have backfired. The Chinese are clearly unwilling to make policy changes that come as a result of direct, vociferous, public pressure from foreigners, especially the United States, so the report would have set back the effort as opposed to push it forward. Continuing down the path the report would begin by imposing a retaliatory tariff on Chinese imports and risking a trade war would be dangerous, especially as the American and global economies remain vulnerable to additional shocks.

There is already strong domestic debate within Chinese leadership on the issue. It looks like it is only a matter of time until there is some revaluation of the RMB. Indeed, RMB futures responded bullishly to the news, conveying a belief that the administration’s strategy makes it more likely that China will move in the right direction. Secretary Geithner’s visit to China is another sign that the move is paying immediate dividends in the relationship, and recent signs illustrate that it is likely only a matter of time until China makes a policy change.

Because the greatest victims of China’s currency practices are not Americans but instead other emerging economies, the administration’s decision to pursue diplomatic action through the G-20 makes sense. The G-20’s membership incorporates nations far more affected by China’s currency practices than the U.S. In that light, the administration’s decision last year to double-down on the G-20 in lieu of the G-8 seems all the more prescient. 

While China’s currency practices are a convenient scapegoat for fears about a changing global economy, this situation also requires a bit more perspective than some are taking today. While the Chinese currency practices are certainly untenable – both for the US and for China – a revaluation of the RMB is unlikely to have significant, short-term economic impact or alleviate America’s economic woes, and Americans will continue to buy cheap consumer goods from other low cost economies (just other low cost economies, which is why China’s currency policy hurts others more than it hurts the US). It’s also important to note that country by country balance matters far less than our global trade balance. 

Fundamentally, the rise of China and many other emerging economies will ultimately suit America’s values and economic interests, as new markets open, and billions emerge from poverty and enter the global middle class. The transition into this new global economy will be bumpy, but the Obama administration’s response of investing in diplomacy through more representative international institutions conveys an appropriate response to these changes and an understanding the most effective, if not the most emotionally satisfying, stewardship of America’s place in the global economy.