Why China's Currency Matters To American Jobs

Here are some basic facts you should know about the China currency dispute and how progressive experts say the United States should respond.

What’s the impact of unfair Chinese trade and currency policies on American jobs?

The U.S. has lost 2.4 million jobs between 2001 and 2008 as a result of China's trade and currency policies. According to a March 2010 study [1] by the Economic Policy Institute, jobs have been lost in every single congressional district in the country. And these aren't just obsolete manufacturing jobs: Since 2001, we have lost more high-tech jobs than manufacturing jobs Economist Rob Scott of EPI believes that if China were not engaging in currency manipulation, the net impact would be an additional 3 million jobs in America in the next few years.

What do you mean when you say "currency manipulation"?

Most major countries, including the United States, allow the value of their currency to "float," continuously rising upward or downward based on global demand for the currency and the strength of their economies. But a few countries, China being the largest, "fix" the value of their currency so it does not fluctuate with conditions in the market. China pegs its exchange rate to the dollar. Since 2008, the rate has been 6.83 yuan to the dolla [2]r. Before 2008, the last time China adjusted the exchange rate for the yuan was in 1994, when the rate was 8.28 yuan to the dollar [2].

The Chinese central bank maintains this fixed exchange rate by buying (or selling) as many dollars as possible, instead of allowing the value of good produced and sold to determine the yuan's value. Meanwhile, as the value of the U.S. dollar has gone up and down against the value of every currency in the world, as the accompanying chart shows, it has remained constant against the yuan. That's kept the value of the yuan artificially low—by as much as 40 percent, say many economic experts.  (Include Chart)

How does that affect jobs here in the U.S.?

It makes goods China sells to the U.S. cheaper than they would otherwise be and goods that the U.S. wants to sell in the Chinese market more expensive, thus making it tougher for America industries that employ American workers to compete. Most economists say that China's fixed currency policy amounts to a 25 percent to 40 percent illegal subsidy of its exports. Economist Paul Krugman was recently quoted [3] as calling it "the most distortionary exchange-rate policy any major nation has ever followed. And it's a policy that seriously damages the rest of the world." 

Aren’t there rules against what China is doing?

Yes. The World Trade Organization and the International Monetary Fund prohibit currency manipulation and illegal subsidies as a barrier to free trade. And the United States has several times in the past identified countries, including China, as currency manipulators.

So what should we do about it?

On April 15, the Treasury Department is expected to release its biannual report on global currency exchange rates [4]. In that report, Treasury Secretary Timothy Geithner can declare China a currency manipulator, and that would set the stage for the U.S. to impose tariffs on imports from China to offset the impact of that manipulation. Meanwhile, Sen. Charles Schumer, D-N.Y., has introduced a bill [5] that would allow the U.S. to impose tariffs on imports from countries with "fundamentally misaligned currencies." He and 14 other senators also signed a letter [6]calling on the Commerce Department to investigate currency manipulation. Calls for tough actions [7] such as these are supported across the political spectrum.

But the U.S. must also address its larger problem, it's lack of an economic strategy for manufacturing in a 21st-century global economy. Other major economic powers take steps to support domestic manufacturing while also being fully engaged in free and fair trade that does not depend on unfair, heavy-handed currency manipulation; the U.S. should do the same.