To counter currency manipulation: rally some allies

In September, Japan seized a Chinese trawler captain after
his boat collided with two Japanese Coast Guard ships near some East China Sea
islands claimed by both countries.

Immediately afterward, China “coincidentally” detained
four Japanese employees of Fujita Corp., charging them with filming in a
restricted military area. When Japan proposed a prisoner swap, China upped the
ante instead — halting shipments of rare earth minerals to Japan. China
controls 93 percent of the world’s rare earths, which are minerals essential
for manufacturing high-tech and energy-efficient products, from cell phones to
wind turbines.

Japan caved, releasing the Chinese captain
unconditionally. Suddenly, China rescinded its restriction on rare earth
exports to Japan and released three of the four imprisoned Japanese nationals,
ending the dispute one captive ahead of Japan.

This incident confirmed China as a burly international tyrant. The caution for
countries attempting to negotiate with China is to avoid Japan’s mistake, which
was single-handedly contesting the giant. For America, that means seeking an
end to China’s currency manipulation by simultaneously pursuing every option
the United States has, including  formally naming China a currency manipulator,
imposing tariffs on imports from countries that undervalue currency and
creating a community of allies to campaign together to combat the illegal trade
practice.

 Rallying partners should be reasonably easy, as Japan,
Brazil and the European Union all have exhorted China in recent weeks to allow
the value of its currency to freely float on international markets.

Like the United States, each has acted unilaterally. Last
week, EU
finance ministers confronted Chinese Premier Wen Jiabao at a European-Asian
economic summit in Brussels. Wen rejected their demands for China to speed
appreciation of the yuan in relationship to the euro.

Also last week, Brazil
doubled a tax it charges foreigners who purchase Brazilian bonds.  This was an attempt to slow speculation
that has increased the value of its currency, the real, by 39 percent against
the dollar over the past 22 months.

A day later, Japan
announced it would lower its benchmark interest rate and purchase $60
billion in government bonds and securities, both actions designed to lower the
value of the yen, which would cheapen its exports.

The Swiss tried intervening in the market in 2009 to hold
down the value of its currency, the franc, but failed. Singapore,
Thailand, India and Canada have considered it.

So far, America has just attempted to persuade China to
stop undervaluing the yuan – a practice that artificially suppresses the price
of Chinese exports while at the same time artificially raising the price of
imports into China from America and other nations.  China’s deliberate currency undervaluation accounts for a
significant part of America’s massive trade deficit with China.

Last spring, the United States asked China politely to
allow the value of its currency to float up. As the United States awaited
China’s answer, the
U.S. Treasury delayed issuing its semi-annual foreign exchange report in
which it could name China as a currency manipulator, then initiate a formal
response.

China
replied June 19 that it would allow the yuan to float on international
currency markets. Treasury then released its report – which,
no surprise, failed to list China as a currency manipulator. Since China’s
announcement, the
yuan has increased in value less than two percent – this for a currency
believed by many economists, including the conservative C. Fred Bergsten, director
of the Peterson Institute for International Economics, to be undervalued
between 25 and 40 percent.

Annoyed with China’s failure to keep its pledge and angry
over unfair trade gutting 2 million jobs from the body of the American economy
over the past decade, Congress reacted just before its recess. With massive
bi-partisan support, the House
passed a bill that would allow the Commerce Department to impose tariffs on
imports to counter the effects of currency manipulation. If passed by the
Senate and signed by President Obama, it would expand the definition of
improper government subsidies to include manipulation of currency to gain trade
advantages.

Afterward, just nine days before the next Treasury report
on currency manipulation is due on Oct. 15, Treasury Secretary Timothy
Geithner, in a speech at the Brookings
Institution, offered thinly veiled criticism of China’s persistent
manipulation:

“When
large economies with undervalued exchange rates act to keep the currency from
appreciating, that encourages other countries to do the same. . . This sets off
a dangerous dynamic.”

In rebuffing the European Union’s request for revaluing,
the Chinese prime minister claimed
allowing the yuan to appreciate too quickly would bankrupt Chinese factories
as their prices rose to uncompetitive levels, and the resulting exodus of
unemployed workers to the countryside would provoke social unrest.

No one wants that. Workers everywhere applaud the rise of
millions of Chinese citizens out of abject poverty. But increasing the value of
the yuan will benefit Chinese workers at the same time as it begins to balance currencies
worldwide. An appreciated yuan effectively increases Chinese workers’ wages.

By deliberately undervaluing its currency, the government
of China is waging a stealth trade war against the rest of the world.
Independently, the United States must protect its economy, but to reign in this
international outlaw, America also must secure the help of a posse.

Leo W. Gerard is the United Steelworkers International President.