In These New Times

A new paradigm for a post-imperial world

U.S. exchange rate hegemony should come to halt

Posted by seumasach on March 31, 2010

People’s Daily

23rd March, 2010

The hubbub of calls for Renminbi (RMB) appreciation has been increasingly clamorous in the United States. Of late, some U.S. senators have jointly initiated a bill moved forward by Senator Charles Schumer aimed at stopping China from “manipulating” its currency. The bill urged the Obama government to go on pressurizing China and threaten to list it as a “currency manipulator”.

Washington has turned more and more vocal on this issue, locking China and the U.S. in a wrangle over the value of the yuan, in an argument in which confrontational actions seem to be brewing. Taking an apparently tougher line, these U.S. senators have unveiled legislation that threatens heavy penalties, if Beijing refuses to act. The “Schumer Bill” would possibly penalize currency manipulation as an unfair subsidy and could trigger retaliatory actions.

However, the world’s top “currency manipulator” is, as a matter of fact, really groundless since it exercises a US dollar hegemony, which has set the longest historical record and made the most substantial benefits by manipulating the exchange rate, and triggered a global financial crisis and economic crisis.

Only with a cold war mentality, hegemonic arrogance and prejudice in thought, a few U.S. politicians are telling whooping lies to shirk responsibilities by accusing other countries and shift their internal contradiction to cash in political votes.

Currently, the RMB is still not an international currency and there exist no technology and market conditions for manipulating its exchange rate. So, it is totally groundless to charge China with the manipulation of the RMB exchange rate. In contrast, the US dollar hegemony with the use of favorable conditions to manipulate its exchange rate has become the usual means for the United States to plunder the wealth around the world, and to influence the exchange rate through the manipulation of the dollar supply and demand.

In the global financial crisis, the United States first resorted to the “Stabilization Fund” to sell a large amount of euro, so the euro plunged and dollar rose, and then more dollars were printed to fill up the bad debts. By means of manipulating the dollar, the U.S. has also made dollar assets in many countries shrink in value, so as to alleviate their huge external debt pressure while making use of the “valuation effect” to enhance their external asset value.

There is an ample evidence, however, that total U.S. foreign liabilities rose by 3.856 trillion US dollars while net debts decreased by 199 trillion US dollars between 2001 and 2006, or with a net profit of 4.055 trillion dollars in capital gain during the period, of which 892 billion dollars have contributed to manipulating the depreciation of the dollar and gained a profit of 3.163 trillion dollars through suppressing or keeping down other nations’ currencies for appreciation and manufacturing asset price changes.

From a historical point of view, the use of the dollar exchange rate to hold down other countries and force the currencies in these countries to appreciate is a usual trick the U.S. has often employed to curb their development. European nations and Japan have suffered a lot in this regard. The U.S. forced a sharp appreciation of the Deutsche mark in Western Germany by 64 percent in the 1980s; it compelled Japan to accede to the “Plaza Accord”, an agreement inked between the U.S., Britain, France, West Germany and Japan in the Plaza Hotel in the New York City in 1985 and this led to a sharp appreciation of the yen, thereby causing a long-term economic recession in Japan.

Likewise, in forcing the RMB to appreciate today, the purpose of the United States is also to contain China’s development, so as to make up the international balance of payment deficit caused by the U.S. lack of competitiveness and to enable the U.S. to enjoy the wealth transfer from the appreciation of yuan.

Nevertheless, the forced appreciation of RMB is not only erroneous but not profiting at others’ expense. With the RMB appreciation, China’s export prices will be on rise, the U.S. trade deficit with China will transfer to other counties; so the United States must import goods at higher costs and it would contribute directly to the price increase in the U.S., and so burdens would add to American consumers.

In term of both theoretical and practical perspectives, a nation’s trade surplus or deficit does not have much to do with its currency exchange rate. At present, a rapid, efficient way for the reduction of the U.S. trade deficit with China is precisely for the United States to remove restrictions on exporting its high-tech products to China and to step up the export of US high-tech products to China.

With respect to the exchange rate issue, the United States cannot go in for the “double standards” or practice its exchange rate hegemony. On the contrary, the U.S. should, by the adoption of an equal and open attitude, welcome and support the RMB to be turned into a currency in the international monetary system, so its exchange rate will gradually become market-oriented.

Fundamentally speaking, the exchange rate issue is not a market issue or an economic issue; it cannot be politicalized but has to be tackled gradually by equal consultations and mutually beneficial cooperation, whereas frequent accusations, pressures or sanctions are all futile. Anyhow, China would neither bow to U.S. pressures and nor follow the same disastrous beaten track taken by Japan with the “Plaza Accord”.

By People’s Daily Online and contributed by Prof. Shi Jianxun, an especially PD-invited guest commentator and an economist at the School of Economics and Management with elite Tongji University in Shanghai

By People’s Daily Online

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