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GEITHNER GETS IT WRONG ON YUAN

Sungjoon Cho

Asia Times, January 28, 2009

The Barack Obama administration has certainly brought some change to United States policy. Sharply departing from a more engaging China policy, Treasury Secretary Tim Geithner rattled the ground by declaring during his confirmation hearings that China was "manipulating" its currency, the yuan, and vowing that the US would employ "aggressive" means to remedy this.

Not only are the grounds of such a claim insecure, but the timing and the manner of his comments are highly inappropriate. The US should not attempt unilaterally to search for and then destroy economic weapons of mass destruction.

The accusation on China's currency manipulation is not new. Geithner's predecessor, Hank Paulson, implied a certain connection between the current financial meltdown and global imbalances caused by China's foreign exchange policy. In a similar tone, Representative Sander Levin, who chairs the sub-committee on trade within the House Ways and Means Committee, has recently proposed suing China before the World Trade Organization (WTO) for its alleged currency manipulation.

Yet, a closer scrutiny tends to find such claims barely persuasive. As of November 2008, China's share of US exports was only 5.4% and its share in US imports 19.1%. It is too extensive and inferential to argue that China's currency policy, no matter what it may be, has caused the massive US trade deficit.

Former Federal Reserve chairman Alan Greenspan observed a few years ago that even a 20% revaluation of the yuan would not dent the US trade deficit. He was right: since 2005, the value of the yuan has risen by about 20% and there is no sign that it has helped reduce the US trade deficit.

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