Currency Manipulations

The “exchange rate war” is shaping up between the U.S. and China. Both countries accuse each other of protectionism and threaten to report each other to the World Trade Organization (WTO). As such, the House of Representatives adopted a law on Wednesday to punish China with import tariffs if it does not increase the value of its currency. Earlier, China increased the levies on chicken meat, after the American government did the same for Chinese car tires.

The conflict revolves around the question if, and to what degree, China is guilty of “exchange rate manipulation,” as it is called in the U.S. with a sense of moral indignation. Some estimates run up to 40 percent undervaluation. But the fact is that the yuan is being held artificially low.

Since the Chinese central bank announced in June that it would — within a fixed bandwidth — loosen the reins somewhat, the exchange rate went up one and a half percent. If the Chinese authorities continue to follow that line, it will take almost four years before the yuan has gained 20 percent in value. The U.S. strives for nothing less than a shock therapy.

Both present the “exchange rate war” as a monetary dispute. But, at its core, it is just a political conflict, with both national and international components.

President Obama demands more revaluation to offer his voters hope for employment, even though he does not mention the fact that the American industry has long lost the competition with the Chinese and that developing countries such as Vietnam, Laos or Bangladesh are more likely to benefit from a shock therapy than the Rust Belt in, say, Detroit.

Premier Wen Jiabao has a similar dilemma. A more expensive yuan crosses the government plan to relocate the simple labor-intensive industries from the ecologically burdened East Coast to the rural West. The Communist Party may be powerful. They most certainly have to navigate between the interests of the working class, who have a scant job in the export industry, and the urban middle groups, for whom price control is important. The government stands between these two fires. With a margin of five percent, it can slow down exports and foreign investments without endangering the national consumption.

These contrary interests hardly let themselves be reconciled. American threats, therefore, mainly have symbolic value, as do Chinese sanctions, which Beijing can present as proof of its growing dominance.

Concepts such as “currency manipulation” hit this new reality dead-on. America would do better to look for new allies in the WTO — and not only in the postindustrial world, but mainly in Southeast Asia, where the young industrial countries also have an interest in a structurally more expensive yuan.

That is a difficult task because China has allied itself with an increasing number of those countries, as the antagonism of “Uncle Sam,” who apparently does not pose any political demands, rises.

Burdened by the past, America does not come in between easily. But it is possible.