When President Obama meets with Chinese President Hu Jintao this week, one of the top items on the agenda will be resolving a dispute over how China sets the value of its currency. If Obama gets his way, it could spur U.S. exports, but it could also mean higher prices for American consumers.
For over a decade, China has held down the value of its currency, the Yuan, in relation to the dollar. That helps keep the cost of the goods Americans buy from China low and the price of American goods sold in China high. The cheap Chinese currency has helped open a wide trade imbalance between the two countries. In 2010, China’s trade advantage with the U.S. was more than $252 billion.
The Obama administration has made stopping China’s currency manipulation a central focus of the president’s push to increase American exports.
“China still closely manages the level of its exchange rate and restricts the ability of capital to move in and out of the country,” Treasury Secretary Timothy Geithner said is a speech last week. “As the [International Monetary Fund] has said consistently, these policies have the effect of keeping the Chinese currency substantially undervalued.”
On the surface, it’s a positive for American consumers. Nearly every product-- from candy to electronics to bicycles – is cheaper in the United States if it’s imported from China.
“It means the goods we import from China are cheaper than they should be,” says analyst Nicolas Consonery, an analyst with the Eurasia Group, a consulting firm that evaluates political processes in nations around the globe.
But for decades the United States has been pressuring China to rebalance its economy and bring the Yuan to a level playing field with the dollar, because American exports can’t compete with the Chinese goods.
“It would probably mean that a lot of those goods get more expensive,” Consonery explains. “But in the longer term, it’s an adjustment that needs to be made.”
The Obama administration has a goal of doubling U.S. exports in the next five years. But that won’t happen if China, the world’s fastest-growing market, remains out of reach to American companies because of the under-valued Yuan.
The consensus among economists is that the Yuan is 20 to 25 percent undervalued, up from 40 percent a few years ago. Consonery says this is real progress.
“It moved up nominally against the dollar more than three percent last year. And in real terms, if you look at the inflationary situation in China -- that wages are going up, that prices are going up – it’s becoming more expensive to produce in China anyway,” he said. “So in real terms, the real effective exchange rate of the currency is going up as well.”
The Fair Currency Coalition, a group that “seeks to end the practice of currency misalignment,” says the Treasury Department hasn’t adequately designated China as a manipulator since the mid 1990s, and that negotiations through the IMF or with China directly aren’t enough.
“As is painfully apparent, China’s leaders not only have rebuffed these U.S. initiatives, they have not acted upon the IMF’s urgings to revalue the [Yuan] meaningfully,” the group says on its Web site. “China’s government clearly is wedded to an export-led model of growth without regard to the damage and severe imbalances being caused to the United States and the rest of the world.”
Obama is sure to bring up the issue with President Hu, who is likely to leave his post at the end of next year or the beginning of 2013. Many analysts agree this is probably Hu’s last visit to the United States and he wants to leave on good terms.
“You see both sides pressing for their domestic interests, and as China gets weightier and more influential globally, they are testing the ways they can do that more seriously and more assertively,” Consonery said. “So I definitely think this is a trend you see continue in 2011 and beyond.”
In the short term, a fairer Yuan probably means higher prices for American consumers. But the long-term payoff could mean more jobs at home and healthier competition for goods on the global market.