As President Obama packs his bags for Asia, he'd better throw in
plenty of antacids, iron supplements, and earplugs. He'll need all
three if he is to resist mounting pressure at home to throw a public fit at the Chinese for holding their currency, the renminbi (RMB), or the yuan, artificially low, to the obvious detriment of other economies, not least America's. Coming from critics as prestigious and generally pro-Obama as Nobel economics laureate Paul Krugman, writing in his Oct. 22 New York Times column, that pressure is substantively valid, politically compelling -- and best ignored.
First, for the valid part: By holding the yuan down, China
cheapens the prices of its exports and effectively raises the prices of its imports, thus disadvantaging the economies of other countries, and, as Krugman puts it, “stealing” American jobs. Fair enough, as far as the economics are concerned -- but even at this recession-wracked moment, that's only so far. As analysts have the luxury of forgetting -- but the President does not -- China's currency practices constitute one tree in the vast forest that is the Sino-American relationship. This is not the time for Obama to go blind to the forest.
Another tree that could really use some attention here is that of
China's own self-interest. Krugman and company talk as if China's continued low-balling of its currency would spell eternal feast for China and famine for everybody else. But the happy fact is that in the long – even medium -- run, the cheapening of the yuan is bad for China, too. Let's suppose everybody's nightmare comes true: China keeps holding down the yuan, which keeps propping up its exports. Such a strategy would render China as vulnerable as ever to global economic downturns – a vulnerability that Beijing is rightly determined to minimize.
Amid reports of China's 8.9 percent third-quarter growth, it is easy for the outside world to forget how hard the global recession hit here. Not so for the Chinese, who saw the closure of at least 100,000 factories in 2008 alone, and the widespread layoffs, bankruptcies and rioting that resulted. (Upon announcing that his plant would shut down, at least one factory owner was kicked to death by his workers.)
The Chinese know better than anyone that they must reduce their economy’s dependence on exports. But they've also just gotten a pretty clear picture of what will happen if they do it by killing their export-dependent jobs before they've developed viable alternatives. Granted, even now, China's leaders seem to be taking their own sweet time developing those alternatives. Skeptics are right to point out, for example, that they're still heavily subsidizing the usual export-industry behemoths,
and leaving smaller businesses to languish. And the world shouldn't hold its breath for the sweeping reforms required to truly liberalize the Chinese economy.
That said, it's not just economically advisable for Beijing to start moving in the right direction. It's politically imperative. For the Chinese leadership -- even more than for most of their counterparts around the world -- survival depends on their continued ability to improve the material well-being of the population. For the past thirty years, right or wrong, the Chinese people have been generally willing to forego a struggle for political rights in return for relief from the struggle for a decent standard of living. For this regime, prosperity equals legitimacy. To raise the value of the yuan is to raise the net worth of their citizens.
To move away from export-centered manufacturing is to move toward higher-quality, higher-paying service-sector jobs that appeal to China’s growing number of educated workers, who are looking for work -- and not on an assembly line. Moreover, at a time when China faces internal and external pressure to clean up its environmental act, such jobs are markedly less polluting.
Even if China absolutely, positively deserves a good swift kick in its currency-padded behind, that doesn't necessarily mean that the U.S. ought to give it. Yes, China has one hell of a nerve to undervalue the yuan. China also has borders with North Korea, Pakistan and Afghanistan – along with a burgeoning military, a bucketload of cash, and a chronic appetite for international prestige. If you were Barack Obama on the eve of your first presidential visit to China, and you were extremely eager to stabilize several spots in China's vast backyard, could you think of a reason – any reason at all -- not to put all your diplomatic eggs in the currency-bashing basket?
Given that it's ultimately in China's own benefit to put its currency house in order, is it really in America's interest to push it to do so right this second? In a word, no.