U.S. and China must both give way in currency war
Tensions over the cheap yuan are running high amid Chinese Prime Minister Wen Jiabao’s visit to New York. Japan’s deliberate weakening of the yen further aggravates China. The irony is that America, too, might be said to be pursuing a weak currency policy. And there are other, quieter, victims in the currency wars.
Currency strains are proliferating because global growth is scarce. The United States is not recovering fast. Many American businesses and politicians accuse China of taking away American jobs. A congressional committee may vote for trade sanctions on China on Friday. Quarrels could get nasty and lead to reprisals.
American critics of China have a case. The country’s trade deficit with China was $25.9 billion in July, more than half the total. China froze its exchange rate in 2008 to be a global Wal-Mart: a cheap shop when world spending was tight. Only in recent weeks has it allowed a little yuan appreciation. But China, too, has pressing priorities. Wen warns realistically that a 20 to 40 percent appreciation of the yuan, as American lobbyists want, could close Chinese companies, send rural workers back to their homes and threaten “major turbulence in Chinese society.”
As the two major players tussle, others are getting hurt. The Federal Reserve’s intimation of more money printing this week has driven the dollar down. The currency is cheap in yen. And the euro, at $1.33, is priced high, making exports expensive. Yet Europe, too, needs growth — desperately so in its uncompetitive periphery economies. And other Asian currencies such as the Malaysian ringgit have been strengthening against both dollar and yuan.
Global compromise is needed. China should allow the yuan to appreciate more. Doing so would help China’s growth be more balanced. But the United States must be patient about the pace at which this happens. For the dollar, too, is cheap. And the big trade deficit cannot be blamed entirely on a cheap yuan. Euros and yen aren’t cheap but Americans keep buying more European and Japanese cars.