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US President Barack Obama has set the stage for a possible trade war with China by branding the Asian giant a currency manipulator, a term his predecessor George W. Bush had skillfully avoided despite pressure from lawmakers.
"President Obama -- backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency," his Treasury secretary-designate Timothy Geithner said Thursday in written testimony to senators quizzing him over his pending confirmation.
Obama, who took office only Tuesday, has pledged to "use aggressively all the diplomatic avenues open to him to seek change in China's currency practices," Geithner said.
Rank Order - Exports
1 Germany $ 1,530,000,000,000 2008 est.
2. China $ 1,465,000,000,000 2008 est.
3. United States $ 1,377,000,000,000 2008 est.
China Manipulates Its Currency—A Response is Needed By Josh Bivens September 25, 2006 | EPI Policy Memorandum #116 China Manipulates Its Currency—A Response is Needed By L. Josh Bivens and Robert E. Scott The U.S. Treasury Department’s most recent assessment of foreign trading partners' exchange rate policies refused to state that China was manipulating the value of its currency to enhance its international competitiveness.1 However, a serious reading of all evidence on the matter clearly shows that China has exceeded all well-established limits that have been used to determine currency manipulation in the past. This currency manipulation is especially problematic in light of the unprecedented size and continual growth of trade imbalances between the United States and China. The bilateral deficit with China is now responsible for roughly a quarter of the entire U.S. trade deficit, which has reached a startling 6% of gross domestic product (GDP). It is widely agreed that this deficit is unsustainable and that the process of its unwinding could be painful for both the United States and its major trading partners. The higher this deficit is allowed to go, the more wrenching this adjustment will be. China’s currency policy is a primary impediment to reducing this deficit now rather than later (when the costs will be higher). China has violated all established currency manipulation standards There are a number of questions that can be asked to shed light on whether or not a country is manipulating the value of its currency vis-à-vis the dollar for competitive advantage, and, whether or not this harms the United States. First, does it have a high and rising bilateral trade surplus with the United States? Second, is its global current account surplus (the broadest measure of its trade and income flows) high and rising? Third, does it possess a high and rising accumulation of international reserves?2 Table 1 below shows China’s current position in light of these questions and compares it to past cases when the U.S. Treasury Department has found that nations were manipulating the value of their currency vis-à-vis the dollar for competitive gain. On each front, the current position of China well exceeds the previous threshold that led to a finding of manipulation. The bilateral U.S.-China surplus (as measured by the U.S. government) was $203 billion for 2005. This bilateral surplus has risen by $119 billion over the past five years and represents over 9% of China's total GDP. In seven of the nine cases where damaging currency manipulation was found, the U.S. bilateral trade deficit was lower than 9%, and in May 1992—the first time China was found guilty of currency manipulation—its surplus with the United States was only 3.4% of China’s GDP. China's global current account surplus is now over 7% of its GDP, up 5 percentage points in five years. China’s reported current account surplus exceeds levels reached in four of the nine previous cases. Furthermore, there is evidence that demonstrates that China’s own trade data may substantially under-estimate its global trade and current account surpluses.3 Using data on Chinese imports and exports from its top 40 trading partners (covering 88-95% of China’s total trade), the China Currency Coalition estimated that China’s total trade surplus in 2003 was $203 billion, 341% more than China’s officially reported trade surplus of only $46 billion. China’s international reserves increased by $207 billion in 2005, ending the year at $821 billion. The best estimates are that 70% of these are dollar reserves and that this share has remained stable over time. These international reserves constitute 36% of China's total GDP and are sufficient to finance over a year of Chinese imports. China’s purchase of reserves in the form of dollar-denominated assets has propped up the value of the dollar, keeping the Chinese currency from gaining value. In short, these reserve purchases act as a de facto subsidy for Chinese exports into the U.S. market. Chinese currency policies affect more than just bilateral trade between China and the United States. Since 2002, the dollar has depreciated by 36% against the euro. Since the yuan is pegged firmly to the dollar, it depreciated as well. Since 2003, Chinese exports to the EU-25 (made much more competitive by the euro/dollar depreciation) are up by over 52 billion euros, while U.S. exports to these countries are up just over 5 billion euros (see Figure A). Thus, the yuan-dollar currency peg affects third-party (China/European Union) trade relationships as well.
Conclusion Every available indicator demonstrates that China is manipulating the value of its currency with the intent of spurring the growth of its trade surpluses. This currency manipulation has had damaging effects on some sectors of the U.S. economy and has been a primary contributor to the enormous run-up in the American trade and current account deficits. For the sake of stability in the U.S. economy, the Chinese economy, and the global economy, action needs to be taken to begin unwinding these imbalances.
Originally posted by antar
It is very unfortunate that at the end of the Clinton administration, when the deficit was in surplus, that we did not close all relations with China at that point.
Originally posted by disgustedbyhumanity
What will ultimately happen is the fed will end up buying all the outstanding treasuries held by foriegn countries. They will also buy all the homeloans, credit card loans, auto loans, etc from all the banks.
Originally posted by disgustedbyhumanity
Then the USA will take over the fed and basically just erase all the debt off the books. America will then have the debt overhang off their backs. A new US currency wil be created and the banks will be recapitalized. Our country and it's citizens will be out of debt and ready to begin the most prosperous era in American history. All it takes is the will and proper oversight to make it work. Sometimes it is just smarter to start over.