by Robert E. Scott
China’s decision to devalue its currency last month means that it has chosen to export its unemployment problem, rather than take the hard steps needed to restructure its domestic economy.
Over the past decade, trade deficits caused by currency manipulation by about 20 mostly Asian countries, predominantly China, has eliminated between 2.3 million and 5.8 million U.S. jobs. The yuan fell 4.4 percent in the first three days after China announced its devaluation, and a cumulative drop of 10 to 15 percent is possible over the next two weeks, according to the Economist Intelligence Unit.
A devaluation of the yuan of between 4.4 to 15 percent, if it persists, would likely increase U.S. trade deficits sufficiently to eliminate between 190,000 and 640,000 U.S. jobs. There is growing, bipartisan support from both Republicans and Democrats for new policies to end currency manipulation and to reverse the damage it has done to the U.S. economy.
Congress should take immediate steps to pass tough laws to end currency manipulation and to ensure that injured domestic workers and companies obtain timely relief from unfairly traded imports.
To evaluate the costs of China’s currency devaluation, I use the results of C. Fred Bergsten and Joseph E. Gagnon’s study for the Peterson Institute for International Economics, which used the Federal Reserve Board’s macroeconomic model to assess the effects of a 10 percent depreciation of the trade-weighted value of the U.S. dollar.
China is America’s largest trading partner, responsible for 21.3 percent of total U.S. trade, based on the trade weights used in the Federal Reserve’s Broad Index of the U.S. dollar.
Thus, a 4.4 percent devaluation of the yuan (or renminbi, as it is also known) translates into a 0.9 percent appreciation of the real U.S. dollar. Likewise, a 10 percent devaluation would increase the U.S. dollar by 2.1 percent, and a 15 percent devaluation would increase the value of the dollar by 3.2 percent.
Bergsten and Gagnon asked the Federal Reserve staff to assess the impact of a 10 percent depreciation of the trade-weighted dollar (appreciations usually have a similar impact, with the opposite sign).
The Fed model, which assumed that the full effects of the depreciation are usually felt after two to three years, found that the given depreciation of the dollar would increase GDP by 1.5 percent, creating 2 million jobs, and narrow the current account (the broadest measure of the trade deficit) by nearly 1 percent (the impact on GDP is larger than the trade effect because of multiplier effects in the model).
Using these results as a framework for evaluating the effect of the Chinese devaluation on the U.S. economy, the 4.4 percent devaluation of the yuan that took place between August 11 and 13 will reduce U.S. GDP by 0.14 percent ($29 billion dollars in 2018, based on the Congressional Budget Office’s January 2015 Baseline Economic Outlook), increasing the trade deficit (current account) by $19 billion, and eliminating 190,000 jobs in the domestic economy.
Furthermore, if the devaluation of the yuan ultimately reaches 10 percent, it will reduce U.S. GDP by 0.32 percent ($66 billion), increasing the trade deficit by $44 billion, and costing 430,000 U.S. jobs. Finally, if the devaluation reaches 15 percent, then it will reduce U.S. GDP by 0.48 percent ($99 billion), increasing the trade deficit by $66 billion and eliminating 640,000 U.S. jobs.
These results are conservative because they do not account for the repercussions of China’s devaluation on economic policies and financial markets around the world—particularly the pressure it will put on other trading partners to devalue their own currencies to preserve competitiveness.
On Tuesday, alone, the South Korean currency, the won, fell by 1.4 percent against the U.S. dollar (Korea is a known currency manipulator), and the Australian dollar (which is not managed) fell 1.1 percent. Widespread devaluations throughout Asia, prompted by China’s new efforts to manipulate the yuan, would result in bigger trade deficits, further declines in U.S. GDP, and more job losses.
Congress should take advantage of the groundswell of bipartisan concern about the negative impacts of the devaluation of the yuan to pass new laws and resolutions on three closely related issues.
First, both houses of Congress should insist that the proposed Trans-Pacific Partnership (TPP) must contain strong, enforceable restrictions on currency manipulation. Although China is not a member of the TPP, its actions can (and have) prompted members of the proposed deal such as Japan, Singapore, and Malaysia, to manipulate the value of their own currencies, negating any advantages obtained by the United States in that trade and investment deal.
Second, Congress needs to pass legislation that would establish a clear-cut definition of a “fundamentally undervalued” currency and establish that countervailing duties may be imposed on imports from any country that maintains such currency values.
Such legislation has been proposed in the house as H.R. 820, The Currency Reform for Fair Trade Act, and similar legislation has been proposed in the Senate as S. 433, The Currency Undervaluation Investigation Act.
There is remarkable bipartisan support on this issue, as indicated in remarks by Senator Charles Grassley, who said that “both Democrats and Republicans have exercised too much caution in dealing with China on the issue of currency manipulation.”
Third, it is also time for Congress and the administration to undertake a fundamental review and reform and of U.S. fair trade laws, which have not undergone a major review or update for more than a quarter of a century, since the passage of the Omnibus Trade and Competitiveness Act of 1988.
Since that time, U.S. imports from China have increased more than fiftyfold, rising from $8.5 billion in 1988 to $466.8 billion in 2014. China has fundamentally changed the structure of the global economy in that period, yet U.S. fair trade laws have not been adjusted to reflect this new reality.
Two particular problems involving unfair trade from China and other countries must be addressed in reforming U.S. fair trade law.
First, China has become the leading world producer and exporter of many manufactured goods, including basic steel products such as bars, rounds, and hot-rolled bands, which have been dumped and subsidized, and are now subject to anti-dumping and countervailing duties in the United States.
China has rapidly increased exports of those same semi-finished commodities to other countries, where they are transformed into high-valued products such as cold-rolled steel (for autos) and steel pipe and tubes (such as oil country tubular goods).
Under existing anti-dumping and countervailing duty laws, there is no clear way in most cases to place duties on the downstream products that reflect the dumping and subsidies embedded in the Chinese inputs (see page 56 in the recent EPI/Stewart and Stewart report, Surging Steel Imports Put Up To Half a Million U.S. Jobs At Risk).
In addition, as presently interpreted under U.S. law, most or all of the domestic producers in an industry that has been harmed by unfair imports must be suffering actual losses, or be imminently threatened with such losses, before import relief can be obtained.
Thousands or tens of thousands of jobs can be lost before such a point is reached, and profits can be depressed for many years (thereby reducing investment and other benefits of strong domestic output) before such relief can be obtained.
While this was not the intent of Congress, as is clear from the statute, further refinements to U.S. fair trade law may be needed to ensure that domestic producers can obtain prompt and effective relief from unfair imports before massive damage has been done to domestic workers, communities, or producers of competing domestic products in unfair trade cases.
Currency manipulation by China and a number of other countries, most in Asia, has cost millions of jobs in the United States in the past. The new round of devaluations by China, which may trigger another wave of massive, regional devaluations, will eliminate at least 190,000 to 640,000 additional U.S. jobs. And this is only the beginning.
The Asian financial crisis of 1997–1998 triggered a round of competitive devaluations that locked in possibilities for currency manipulation throughout the next decade and across the region, strongly contributing to the loss of 5 million U.S. manufacturing jobs between 1997 and 2014. The U.S. manufacturing sector, along with the rest of the economy, is still struggling to recover from the Great Recession of 2007–2008, and we cannot afford to rescue China from its own domestic economic difficulties.
Members of Congress from both parties should come together this fall to tell the president that the TPP must include enforceable rules to prohibit currency manipulation, to enact new legislation to end currency manipulation by China and other countries, and to ensure that domestic workers and industries are fully and fairly shielded from unfair competition.
Robert E. Scott is Director of Trade and Manufacturing Policy Research at the Economic Policy Institute. He has testified as an expert witness for U.S. producers of a number of steel products in anti-dumping, countervailing duty, and import surge cases before the U.S. International Trade Commission.
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