Freedom Line Blog

That was the topic taken up by two of the nation’s finest economic journalists over the weekend.

Newsweek’s Robert Samuelson, one of the few legitimate talents left on that particular sinking ship, says yes:

… What’s missing [to promote a global economic rebalancing] is a sizable revaluation of China’s currency, the renminbi. Fred Bergsten of the Peterson Institute thinks the renminbi may be 40 percent undervalued against the dollar. This gives China’s exports a huge advantage and underpins its trade surpluses. Other Asian countries fear altering their currencies if China doesn’t change first. “They’ll lose ground to China,” notes Hensley. The European Union, Brazil and India all feel threatened by the renminbi. President Obama wants U.S. exports to double in five years. That’s probably unrealistic, but it’s impossible if the renminbi isn’t revalued.

Samuelson is rarely deserving of a public refutation, but gets one (though it’s not targeted at him) from a recent column by the always-insightful Steve Forbes, who lays the China hysteria to rest:

… A decade and a half ago China fixed the yuan to the dollar. If there had been any mistake in the exchange rate it would have been flushed out in trade patterns fairly quickly. Again, to simplify: If you sell a bottle of wine for four loaves of bread but suddenly notice you’re getting only two loaves, you’ll adjust your price pretty quickly to ensure you’ll get those four loaves again.

 By fixing the yuan to the dollar Beijing outsourced its monetary policy to the Federal Reserve. And for this “manipulation” Washington politicians and policymakers are in a lather of outrage. This fixing of a measure of value has enormously facilitated commerce–and thus prosperity. During the last 15 years U.S. exports to China have increased 650%, China’s exports to the U.S. almost 670%.

As I noted in my criticism of Obama’s exports fetish in this year’s State of the Union, a focus on so-called “trade deficits” is meaningless. Forbes gives an excellent explanation:

The notion that a trade deficit or surplus indicates anything about an economy’s health is also mistaken. The U.S. has had a trade deficit with the rest of the world for some 350 years out of the 400-plus since Jamestown was settled in 1607. Focusing on deficits and surpluses ignores equally important flows of capital, as well as the phenomenon of supply chains and the intracompany trade that crosses borders.

Americans will survive Beijing’s economic policies intact. Whether we can say the same about Washington’s is another question altogether.