The Right and Wrong Price for Holding on the China Currency Report

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China-US Flags.jpgThe White House has announced that it will delay a Treasury Department report reviewing whether China is manipulating its currency.
This delay is likely tied to three goals of the US.
First, the US wants to stop the slide in US-China relations. After Obama’s meeting with the Dalai Lama, Hillary Clinton’s swats at China over internet freedom and lack of cooperation on Iran, and some tough wrestling on where “global economic rebalancing” should start, the temperature between both global powers has been getting icier. Obama and team want to turn this around, particularly in light of Hu Jintao’s trip to Washington in a week and a half.
Second, the US may hope that the growing tension between the nations combined with the “potential willingness” of the Department of Treasury to enable a spate of China-directed economic penalties may finally move China to float the value of its currency up at a faster pace.
Third, some are suggesting that the US has traded backing off on its currency findings if China demonstrates more support in the UN Security Council for tougher Iran sanctions. We’ll see.
Back room deal making with great powers to achieve significant international objectives makes sense — and Iran is one of those big problems today. I worry though that State Department and White House strategists may not see the difference between tying China into an effective comprehensive plan to change Iran’s nuclear track on one hand and roping China into an ineffective sanctions strategy on the other.
So, if the US did trade away its economic interests by holding back on the currency report, or burying it, the price needs to be higher than Chinese support of Iran sanctions.
— Steve Clemons

Comments

13 comments on “The Right and Wrong Price for Holding on the China Currency Report

  1. Jerry says:

    High VATs hold consumption down.

    Reply

  2. WigWag says:

    “But that would likely change rapidly if the US opened its economy up to Iranian trade.” (Dan Kervick)
    Maybe, but I wouldn’t exaggerate how much more rapid Iranian GDP growth would be if the United States and Iran enjoyed normal relations.
    While I don’t doubt that the myriad measures that the United States enforces against Iran has serious negative consequences for the Iranian economy, it is important to remember that Iran trades freely with most of the rest of the world.
    Iran has normal trade relations with China, India, Russia and much of Western Europe. It also has numerous trading partners in South America including Venezuela and the region’s largest economy, Brazil.
    Despite its educated population and vast oil reserves and despite being able to trade with almost everyone but the United States, the Iranian economy is moribund and its per capita GDP is abysmal.
    While Iranian-American relations surely present an impediment to economic growth in Iran, far and away the most important culprit is the incompetence of the regime itself.
    Isn’t the epithet on W.C. Fields grave, “I’d rather be in Philadelphia?”
    Well economically speaking Iran is in Philadelphia or to be more precise, it’s a nation with an economy that’s the same size of the economy of a midsize American city.
    If the United States did develop more normal relations with Iran, exactly how big would the Iranian economy get?
    Do you think if they played their cards right their economy might grow as large as the economy of Chicago?

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  3. ... says:

    but dan k – the usa can’t do that… the usa stands for everything backward and regressive… if it was to open up trade with cuba or iran, what would folks like me have to complain about???

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  4. Dan Kervick says:

    “Actually even with all its oil wealth and its “educated population” of 74 million, Iran has a GDP smaller than the GDP of Philadelphia.
    But that would likely change rapidly if the US opened its economy up to Iranian trade.

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  5. WigWag says:

    “When they finally liberate the consumption power of their people, it won’t be to buy our goods; it will be mainly to buy their own goods.” (Dan Kervick)
    Time will tell if Dan

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  6. Dan Kervick says:

    If floating their currency now is really in the Chinese interest, then surely some skilled diplomats and informed teams of economists can successfully persuade China of that fact. They seem rather bright, don’t they?
    But if keeping their currency pegged to the dollar remains in the Chinese interest, then there is little the United States can do to move them toward a policy that would, granted, benefit the rest of us, but which requires the Chinese to abandon an export-based state capitalist growth strategy that has paid off so handsomely for them for a few decades now, and is continuing to pay off, even during the recession.
    China isn’t Japan. Japan is a resource-poor island seafaring nation that needs the world and permanent global integration to maintain high levels of prosperity. China is a vast resource rich land with three times the population of the US and Japan combined, and that has still only scratched the surface of its immense industrial potential.
    My hypothesis is that China plans to use the world’s craving for cheap products as long as it has to to build up their own industrial capacity and technological level to a point where they can begin to move toward self-sufficiency. They will eventually use their growing state investment in brain power to move into higher tech industries and innovate alternative and domestically sustainable energy and manufacturing technologies, allowing them to wean themselves off of the global resources upon which they are still dependent for their growth. When they finally liberate the consumption power of their people, it won’t be to buy our goods; it will be mainly to buy their own goods.
    China contains two planets worth of an economy. In the end, they won’t need us – any of us.
    This is hard for Americans to accept. The US is dominated by an inherently evangelical global outlook that is determined to dominate the world ideologically, and convert each and every soul in it to the church of American liberal capitalism.
    The Chinese don’t want to rule the world. They disdain the world and only want to rule China, and everything they do globally is only a stepping stone toward an ideal of the prosperous self-sufficiency of the Middle Kingdom. When they can achieve that end, they will build a new economic and security “great wall.” Other countries can’t afford to beggar their neighbors. China will eventually say, “Neighbors? What neighbors?”
    The Chinese also perhaps learned something from the collapse of the Soviet communist experiment, and the struggles of the American consumerist experiment. The people won’t work and strive in conditions of overly-organized, stagnant and collectivized need-fulfillment, especially when everyone around them is richer and little room is permitted for entrepreneurial spirit and creativity, and when they are a bunch of melancholy Russians to begin with; and the people grow dumb, numb, fat and dissolute if you allow them to spend everything they make and satisfy all of their hedonistic lusts – on credit. You need to keep everyone a bit hungry and striving, with the real possibility of personal economic improvement, for oneself and one’s family, always around the corner, but without allowing them to satisfy all their cravings at once.
    The Chinese won’t need us in the end. Right now, however, the Chinese certainly do need the resource security we provide. If the US would move to build a new and more mutually beneficial economic relationship with the largest, best educated and most important emerging power in the Middle East, we could take advantage of that need and improve our bargaining position. Of course, that would require bold and courageous, big-thinking global strategy, instead of finger-to-the-wind Democratic Party interest-group politics as usual; or the Republican government-phobic non-strategy of planning nothing, shutting down the capacities of government, giving everybody a tax break, buying a continent-load of armaments and hoping for the best.
    The Chinese won’t need us in the end. Right now, however, the Chinese certainly do need the resource security we provide. If the US would move to build a new and more mutually beneficial economic relationship with the largest, best educated and most important emerging power in the Middle East, we could take advantage of that need and improve our bargaining position. Of course, that would require bold and courageous, big-thinking global strategy, instead of finger-to-the-wind Democratic Party interest-group politics as usual; or the Republican government-phobic non-strategy of planning and organizing nothing, giving everybody a tax break and hoping for the best.

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  7. Don Bacon says:

    US foreign policy must be “to deter Iranian nuclear aspirations?” Where is the proof of these “nuclear aspirations?” Since when should foreign policy, including the prospect of war, be based on unprovable “aspirations?”
    Iran’s nuclear enrichment program for civilian purposes, unlike Israel’s, is under full UN surveillance, and the IAEA has consistently and continually reported that there is no diversion of nuclear fuel to weapons programs. (Unlike in Israel which has no UN surveillance and had nukes.)
    This “aspirations” business is all hogwash, based on Israeli baseless contentions, and anyone advancing such baloney is in effect an agent of Israel. I mean, I aspire to bring a bluegrass band to the Opry with me playing the mando like Ricky Skaggs, but it ain’t gonna happen.
    Actually, the effect of delaying action against China on its currency because of Iran sanctions is beneficial because (1) the sanctions will be worthless (China/Iran discussions have already insured that) and (2) who wants higher prices at WalMart?

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  8. JohnH says:

    What are the practical implications of declaring China to be a currency manipulator? I have not seen any discussion.
    Well, one result of increasing import tariffs would be a surge of prices at WalMart. Now that will be a popular move!
    But would it have any impact on Chinese production or exports? I doubt it. Most of the stuff China makes got off-shored to avoid US wages, labor laws, environmental regulations, etc. The US doesn’t even know how to manufacture most of this stuff any more.
    Furthermore it would push China further in the direction it is already moving–manufacture of higher value added products. Increasingly, China will be happy to off-load a lot of the trash and trinkets it manufactures for Western markets.
    Like all the chest thumping driven by limbic testosterone surges of those advocating sanctions against Iran, declaring China to be a currency manipulator satisfies primal urges but does little in the way of effective policy outcomes.
    Like Wall Street, Big Oil, Big Defense, and Big Pharma, China has simply become too big punish without serious negative repercussions.
    A more practical solution would involve the US addressing its own voracious appetite for imports, particularly oil, as well as engaging in industrial policies that support American production, infrastructure and jobs.

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  9. WigWag says:

    “So, if the US did trade away its economic interests by holding back on the currency report, or burying it, the price needs to be higher than Chinese support of Iran sanctions.” (Steve Clemons)
    Precisely right!
    Trading away legitimate American concerns about Chinese currency manipulation in order to win Chinese approval for sanctions that won’t work to deter Iranian nuclear aspirations makes absolutely no sense. Of course, that fact that it makes no sense won’t serve as an impediment to this Administration from doing the wrong and dimwitted thing.
    To win China and Russia’s approval, any sanctions regime will have to be so watered down that it becomes practically meaningless. This is the one thing that everyone, on all sides of this argument, agrees on. The crack cocaine realists (aka Flynt and Hillary) know it; so does the Wall Street Journal, the hierarchy at the Weekly Standard and all the rest of the Iran hawks.
    The United States would be far better off to follow the advice that President Sarkozy gave a few months back and institute unilateral but severe sanctions that would be complied with by the Europeans if by no one else.
    Sanctions only make sense if they are followed by a “grand bargain” or by a military strike. A weak argument can be made that sanctions might increase the West’s leverage in obtaining a “grand bargain” at a reasonable price. This seems dubious to me, but I suppose it is possible. Sanctions also serve as a prerequisite to a bombing campaign; at least the United States can say that we tried something before we struck.
    It seems to be only the na

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  10. Mr.Murder says:

    “Second, the US may hope that the growing tension between the nations combined with the “potential willingness” of the Department of Treasury to enable a spate of China-directed economic penalties may finally move China to float the value of its currency up at a faster pace.”
    If only they would create a housing bubble to float notes upward….
    can we send Bernake their way????

    Reply

  11. The Pessimist says:

    Follow the link for an excellent article examining some seldom mentioned and often marginalized factors driving US economic policy. Tangentially related to the topic above.
    http://pubrecord.org/special-to-the-public-record/7328/abiding-american-citizens-paying-their/
    Almost 12,000 words but well worth the effort.
    Regards

    Reply

  12. Don Bacon says:

    Iran is a “big problem” only because Israel says that it is, so here we have another detrimental side effect of the power of The Lobby, in this case to harm US financial interests.

    Reply

  13. Danny L. McDaniel says:

    If the United States would get its fiscal house in order, re-industrialize and expand its’ manufacturing base, and then prioritize spending on what is really needed we wouldn’t have to worry about China’s currency policy. The US is pointing fingers and picking a fight with an opponent it cannot beat under current conditions. The problems facing the American economy will take decades to change. But it first has to face up to and admit there is a problem before any true economic reform can take place. Similiar to the first step in recovery in what an alcoholic has to take: overcoming denial.
    Danny L. McDaniel
    Lafayette, Indiana

    Reply

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