Manipulation of currency values by China and other developing countries hurts the U.S. economy

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U.S. Dollar in FX. Most of the dollar adjustment against major currencies occurred between February 2002 and December 2004. The dollar fell 36.4 percent against the euro in period 2002- 2004Dollar fell only 4.0 percent between December 2004 and December 2007. . U.S. House Bill . At the end of S

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Manipulation of currency values by China and other developing countries hurts the U.S. economy

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1. Manipulation of currency values by China and other developing countries hurts the U.S. economy Dolores Cobos Rafal Czajkowski Scott MacCorkindale

2. U.S. Dollar in FX Most of the dollar adjustment against major currencies occurred between February 2002 and December 2004. The dollar fell 36.4 percent against the euro in period 2002- 2004 Dollar fell only 4.0 percent between December 2004 and December 2007.

3. U.S. House Bill At the end of September, 2010 the U.S. lawmakers overwhelmingly approved a bill to punish China for what they branded was unfairly undervalued currency, blaming the weak yuan (RNB) for killing US jobs The House has approved legislation that would allow the U.S. to seek trade sanctions against China and other nations for manipulating their currency to gain trade advantages

4. Separate Facts from Fiction Political Science Fiction "Some credible estimates are that we could return a million American jobs to this country," Rep. Xavier Becerra, D-California ‘’Personally I’d tax China very heavily to bring manufacturing jobs back to America’’ Donald Trump

5. What we will discuss is: Does China truly manipulate its currency, and if so, in what way? What are some of the negative consequences of such manipulation for the United States What could be possibly done to remedy the negative outcome for the U.S. and we will formulate a ward of caution of actions that should definitely NOT be undertaken.

6. Fixed exchange rates Is NOT manipulation Conventional Fixed Peg Arrangements: Angola, Argentina, Aruba, Bahamas, Bahrain, Barbados, Belarus, Belize, Bhutan, Bolivia, Cape Verde, Egypt, Eritrea, Ethiopia, Guyana, Honduras, Jordan, Kuwait, Latvia, Lebanon, Lesotho, Macedonia, Malta, Mongolia, Nepal, Netherlands Antilles, Nigeria, Oman, Pakistan, Quatar, Rwanda, Saudi Arabia, Trinidad and Tobogo, Ukraine, Venezuela, Vietnam, Yemen Crawling pegs: China, Azerbaijan, Botswana, Iraq, Nicaragua, Sierra Leone Approximately 70 countries (not all pegged to USD)

7. Developing Countries

8. Statement at question: Does the currency manipulation by China and/ or other developing countries hurt the U.S. economy? --but— NOTE None of the OTHER than China developing countries accounts for even approximation of the size of the U.S. trade with China

9. Red color is trade deficit to China

10. Trade with USA

11. As of January 2011 The values given are for Imports and Exports added together These Countries represent 65.09% of U.S. Imports, and 61.05% of U.S. Exports in goods. Year To Date Total in Total in Billions Billions Country Name of U.S. $ of U.S. $   Canada 45.03 45.03 China 39.43 39.43 Mexico 34.57 34.57 Japan 14.97 14.97 Germany 10.42 10.42 United Kingdom 7.73 7.73 Korea, South 7.40 7.40 Taiwan 5.51 5.51 Brazil 5.44 5.44 France 5.04 5.04

13. The renminbi (RMB)- the ‘people’s currency’ the currency of China for over 50 years a.k.a the Chinese yuan (CNY) and by the symbol 'Ą'.

14. Relative value of RNB Until July 2005 yuan was pegged the US dollar alone at: CNY 8.28 = $ 1.00 Since July 2005 yuan is pegged to a ‘basket’ of currencies: USD, euro, yen, Korean won, + currencies of: U.K., Singapore, Malasia, Russia, Australia, Canada and Thailand.

15. Relative value of RNB The New Chinese policy allowed the yuan’s value to move up or down within a range of 0.3% from the previous day’s close value. In May 2007 this range was widened to 0. 5% In July 2005 China announced that yuan was re-valued (valued upwards) by 2.1 % to: from CNY 8.28 = $1.00 to CNY 8.11 = $ 1. 00

16. Re-valued CNY May 1, 2007 CNY 7.7060 = $ 1.00 January 2008 CNY 7.1959 = $ 1.00 December 2008 CNY 6.8530 = $ 1.00 April 12, 2011 CNY 6.5411 = $ 1.00

17. What is NOT currency manipulation? Intervention of a government (central bank) to buy or sell own (or some other country’s currency) in order to arrive at a particular value of its own currency by definition it is Fixed ( pegged )exchange regime. Why use FIXED instead of FREELY FLOATING exchange rates? Variety of objectives: financial discipline reduced risks of investing and transacting price stability economic stability political stability

18. What is Currency Manipulation? When the People’s Bank of China- Central Bank of China -buys or sells currency (own or foreign) NOT ONLY to set that particular desired value of own RNB-Yuan currency, --but-- in order to achieve ADDITIONAL OBJECTIVE like running a huge GLOBAL TRADE SURPLUS with the rest of the world (exporting more than is imported).

19. How China manipulates its currency? By setting its value lower than it is worth truly worth. How do we know that? What does the value of a currency depend on? Ceteris paribus: *Relative economic growth (positive relationship) *Relative price level (negative relationship) *Relative real interest rates (positive relationship)

20. Relative Real GDP Growth Rates

21. Relative change in price level

22. Interest Rate Differential USA vs China

27. Why undervalued yuan matters to USA ? Y= C + I + G + (X- M) Y-C-T = I + ( G – T ) + ( X – M ) S = I + ( G – T ) + ( X – M) (S – I ) + (T – G) = ( X – M) If ( X – M ) is negative ( trade deficit ) then the sum of National Savings must be also negative domestic savings is insufficient to finance domestic investment ( S – I ) tax revenue insufficient to cover government spending (budget deficit ) ( T – G )

28. Where will the financing of this debt come from ? click for the video

29. U.S. National Debt Clock The Outstanding Public Debt as of 12 Apr 2011 at 08:46:13 AM is: $ 14, 279, 461, 283, 374. 51 The estimated population of the United States is 310,371,855 so each citizen's share of this debt is $ 46,007.59 The National Debt has continued to increase an average of $ 4.08 billion per day since September 28, 2007!

30. U.S. Public Debt as of 2009

31. U.S. Public Debt as of 2010

32. Cumulative Current Account Balance

33. Developed vs Developing Countries

34. Cumulative Current Account Balance

35. How does Chinese central bank interventions differ from interventions of other governments

36. Key distinction: China runs a huge persistent global surplus via currency manipulation

37. Manipulation against United States alone

40. How is it possible that a single nation runs such persistent global trade surplus? Chinese currency RNB (yuan) clearly plays role in this. Discrepancy range: Chinese currency is undervalued betwteen 10 – 40 % toward the U.S. dollar

41. Should U.S. levy tariff on China? China joined the World Trade Organization in 2001 since then China DID reduce its tariffs to a great extent Problem with China is not their engagement in trade per se. Problem is undervalued currency that works as tariff.

42. Jobs lost to China China’s entry into the World Trade Organization in 2001 was touted as a win-win development that would benefit both the U.S. and Chinese economies. Almost a decade later, it is clear that American workers have suffered significant losses. International Economist Robert Scott calculates that 2.4 million American jobs were lost between 2001 and 2008 as a result of increased trade with China, and that those job losses have occurred in every U.S. state and most industries.

43. Job losses to China California lost 370,000 jobs as a result of this trade imbalance with China, has suffered the largest total job loss Texas, New York, Illinois, and Florida, all lost more than 100,000 jobs to China between 2001 and 2008. Measuring job loss as a share of total state employment, New Hampshire lost the most jobs, followed by North Carolina, Massachusetts, California, and Oregon.

44. Agriculture, forestry, fisheries Imports from China $1,661,569 Exports to China $8,876,576 Net Exports $7,215,007 Net U.S. Jobs 27,274 actual gain of jobs Share of Total -1.13 Negative loss= job’s gain

45. Mining (oil, gas, minerals, ores) Imports from China $443,615 Exports to China $768,652 Net Exports $325,037 Net U.S. Jobs -5,288 jobs lost Share of Total 0.22 % of total job loss

46. Manufacturing Imports from China $233,013,576 Exports to China $32,917,917 Net Exports $-200,095,659 Net U.S. Jobs -1,616,281 jobs lost Share of Total 66.93 % of total job loss to China

47. Effects of Cheap Yuan on U.S. Economy

48. Effects of Cheap Yuan on U.S. Economy Chinese Yuan Manipulation hurts the U.S. Economy - Chinese Currency Devalued by as much as 40% - Exports cost up to 40% more to buy - Cost 40% more for China to import from us Rising Trade Deficit - Current Trade imbalance 300 Billion - Current Account won’t be negligible for long - 2011 Highest Recorded January Imbalance

49. Effects of Cheap Yuan on U.S. Economy

50. Effects of Cheap Yuan on U.S. Economy Jobs Go Overseas - Loss of 2.4 Million Jobs between 2001-2008 - Major losses in Manufacturing Sector - Highest Concentration in Computers & Electronics Increased Unemployment In Every State - Each state lost from 0.5 to 2.5 % of job market - Certain Congressional Districts lost nearly 10%

51. Effects of Cheap Yuan on U.S. Economy

52. Effects of Cheap Yuan on U.S. Economy A Floating Yuan = Jobs For U.S. - Estimates range from 500,000 to 3,000,000 - Increased Exports in certain Sectors Chinese Domino Effect - Similar nations want to remain competitive - Devaluations range from 25-35%

53. Currency Manipulation

54. Exports to EU

55. China’s share of US marktes

56. Domestic Share of US Markets

57. China’s share of US markets

58. Currency Reform for Fair Trade Act 2010 Passed the US House of Representatives in September 2010 348 to 79 - and bipartisan. Joint trade between the two countries amounts to nearly $300 billion a year, but it is lopsided: The U.S. trade deficit with China was in excess of $200 billion last year The renminbi is considered to be undervalued by as much as 40% China’s continued manipulation of its currency artificially lowers the cost of Chinese exports and reduces the buying power of the renminbi Both significantly contributes to the trade imbalance between the US and China

59. Currency Reform for Fair Trade Act 2010 By keeping the value of the renminbi artificially low against the dollar, China makes its goods cheaper on world markets, encouraging consumers to buy and underpricing competitors from other countries Opponents said the legislation, if enacted, Could raise prices for U.S. consumers Was more about election-year politics than addressing the trade problems between the two nations Although the threat of congressional action has loomed over U.S.-China relations for years, House vote allowing tariffs to be imposed on countries that chronically undervalue their currency represented an escalation Business groups and some economic analysts warned that the move could prompt tit-for-tat retaliation.

60. Currency Reform for Fair Trade Act 2010 Brazilian Finance Minister Guido Mantega said that a quiet "currency war" is underway. With capital and investment pouring into the faster-growing Asian and Latin American economies, that is increasing demand for local currencies such as the Brazilian real and making them relatively more expensive. And officials in Brazil - whose currency has jumped more than 30 percent against the dollar in the past year and a half - have said they might need to become more aggressive. Money is also flooding into China If the value of the renminbi is not allowed to rise, other countries might feel they have to keep their currencies cheap as well The Japanese central bank intervened and sought to halt a steady rise in its value against the dollar, responding to pressure from its automakers and other manufacturers. Countries such as Colombia and Peru have also been battling to stem the appreciation of their currencies, by selling off their local money and buying dollars South Korea and Taiwan have been increasing their holdings of foreign reserves, one signal of an undervalued local currency

61. Currency Reform for Fair Trade Act 2010 The issue is also testing the ability of organizations such as the International Monetary Fund and G-20 group of nations to make progress on core issues Flexible exchange rates are important to the rebalancing effort and central to a well-functioning global economy China deflected the currency issue at the last G-20 meeting by promising more currency appreciation As time has passed with little result, the United States says it is looking to those international organizations to be more forceful.

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