HONG KONG (Reuters Breakingviews) - It’s time for a treaty on the yuan. The United States paid a price for Beijing’s past manipulation, and making currency policy part of any future trade deal is a good idea. Although the world’s second-largest economy gets fewer benefits from a suppressed rate than it once did, another round of forced depreciation is not inconceivable.
U.S. Trade Representative Robert Lighthizer said this week that U.S. negotiators are looking to prevent China from competitively devaluing the yuan. To some, that seems like asking Beijing to close the barn door after the horse bolted. The central bank has not seriously depressed the currency of late; sometimes it has even propped it up to discourage capital flight as the U.S. Federal Reserve hiked rates.
Yet the People’s Republic pushed down its exchange rate on a massive scale until about 2014, buying up about $1-2 billion of hard currency each business day to depress the yuan and pump exports. That fed an eye-watering current account surplus of 10 percent of GDP in 2007 and built a vast foreign currency reserve that reached $4 trillion. Global currency manipulation – driven by China – cost more than a million American jobs during and after the financial crisis, estimate C. Fred Bergsten and Joseph E. Gagnon of the Peterson Institute for International Economics.
Beijing does not appear likely to revert to its bad old ways soon. But exports still account for roughly a fifth of GDP, and if officials change their mind, there’s little holding them back absent an agreement.
To be sure, currency manipulation is a slippery issue. Switzerland was at one point the world’s biggest violator by some measures, for instance, as it struggled to manage surging capital inflows from Eurozone countries. Even when intervention is aimed at boosting exports, poor countries often get a pass – as do oil-producing nations like Norway, which must offset appreciation pressure generated by commodity exports. Diplomacy is another constraint. U.S. administrations have held back from labelling China a manipulator even when the case was solid.
Chinese negotiators might be more willing to concede on the issue in an economic context where a weak yuan is as dangerous as a strong one. A pact that leaves the issue out would be flawed.
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