Tuesday, October 11, 2011

WSJ.com - Avoiding Smoot-Hawley Redux


WSJ.com - Opinion: Avoiding Smoot-Hawley Redux


There's no question about it: China manipulates its currency. The value of the yuan is largely determined not by market forces but by a "managed float." Beijing sets a target range within which the yuan can be converted into U.S. dollars via markets in Hong Kong. Under most analyses of purchasing power parity, the yuan should probably be at a higher value relative to the dollar.

None of these statements are controversial. The real questions are: What does the managed float mean for America, and what should be done about it?

On the former, the managed float of the yuan means that U.S. imports from China are cheaper than they would otherwise be. It also means that China sits on large dollar reserves that get funneled back into U.S. financial assets (mainly Treasuries and mortgage-backed securities), putting downward pressure on U.S. interest rates.

In addition, it means that if the U.S. could produce the same goods and services at the same price as China, we would be at a comparative disadvantage. The reality, of course, is that the U.S. does not produce the same goods and services at the same price.

On the latter question—what should we do about this—the answer is: not start a trade war.



No comments: