China has long been accused—this year’s presidential campaign not withstanding—of currency manipulation–keeping the value of the Chinese Renminbi (RMB) artificially low in order to stimulate exports and discourage imports. One result of this policy has been China’s high current account surplus with countries such as the United States and the European Union, which leads to considerable political anxiety. This anxiety is particularly felt in the U.S. as many workers believe Chinese policies are, in effect, stealing jobs from Americans and moving them to China. There are multiple ironies in this accusation. While it is no doubt true, China is not alone in its manipulation, and, in any event, it is hardly the biggest bilateral problem Washington has with Beijing. By concentrating excessively on this single issue, we miss opportunities to make a larger point about currency manipulation and overlook other Chinese activities that are doing more damage to our economy.
Currency manipulation is not a small problem. Estimates suggest that governments distort capital flows by approximately $1.5 trillion per year. China accounts for only part of this distortion. Former Federal Reserve Board member Joseph E. Gagnon points out that many other countries engage in the same practices China uses, and while China is improving, other countries keep the total distortion unacceptably large. Meanwhile, although its trajectory has not been smooth, the value of the RMB has increased from approximately 0.13 to 0.16 USD in the last five years. This suggests progress in the case of China and should prompt us to focus more attention on the other offenders.
As shown, there is a need for implementing rules and effective mechanisms to control currency manipulation. Brazil has led the way by urging the World Trade Organization (WTO) to study the problem, a request prompted both by the trade implications of currency manipulation and the failure of the International Monetary Fund (IMF) to take any effective action. In Article IV, Section 1 of the IMF’s Articles of Agreement, IMF members agree to avoid exchange rate manipulation in order to gain competitive advantages over other countries. However, the IMF has no effective tools for enforcing that provision and has not moved aggressively to deal with it within the narrow range of tools it does have. In contrast, the WTO has better instruments but is constrained to defer to the IMF when exchange rate and currency issues arise. Hence, concerted action by both the IMF and the WTO could be the most effective way to deal with currency manipulation.
Although our politicians have emphasized the problems of currency manipulation, from a business perspective, the larger problem with China is intellectual property protection and technology transfer. In 2009, the U.S. International Trade Commission estimated reported losses for American firms due to intellectual property infringements to equal. These estimated losses are only the tip of the iceberg, and their long term implications are serious. The foundation of economic growth and prosperity in the United States is the ability to innovate. By forcing technology transfers–legally or illegally–China is attacking the core competency of our country. As with currency manipulation, there are relatively few tools to deal with this problem. Litigation and use of section 337 of the Tariff Act in the United States are two options that are beginning to catch on, but they are not appropriate in every situation. Diplomatic engagement through our bilateral dialogues with China (namely, the China-U.S. Strategic and Economic Dialogue and the Joint Commission on Commerce and Trade) has also had a positive impact in helping to convince Chinese officials that failure to protect intellectual property ultimately harms Chinese innovators as much if not more than it does foreign innovators. Some companies have had success within the Chinese judicial system, but this approach is unpredictable at best. It would be helpful for Congress to look at this problem more closely since it is so central to our continuing global economic leadership.
In the long term, as Chinese innovators develop more intellectual property of their own and demand that their government protect it, the Chinese government will likely take more aggressive action. On currency, the Chinese government apparently would like to internationalize the RMB, but in order to achieve that goal, Beijing will ultimately have to remove capital controls and let their currency float. Both actions would make good sense and would help reduce the imbalances both within the Chinese economy and between our two economies. Of course, as Keynes said, “In the long run, we are all dead.” Rather than wait for that, the United States would be well advised to pay less attention to Chinese currency and focus more on protecting American intellectual property, the crown jewels of our competitiveness.