President Mitt Romney and a currency manipulating China

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Republican presidential contender Mitt Romney (Pic:www.mittromney.com)

Here is why Mitt Romney should be elected the next president of the United States of America. I cannot wait to see him balk at his own election promise to declare China a currency manipulator on day one of his term.

Romney has frequently said that as part of his get tough with China policy he would declare it a currency manipulator right at the onset of his term. In keeping with his strategy of not being specific he has not let us know at precisely what hour of his first day in the Oval Office he would take that dramatic step. I suppose that could be item number one on the new president’s agenda. So let’s say at 9.03 a.m. January 20, 2013. I have kept three minutes for him to soak in the atmosphere of the office, find his bearings etc.

It has been Romney’s and many others’ considered opinion that Beijing deliberately holds down the value of its currency in order to make its exports cheaper and therefore higher. Here is how it works. Let’s create a fictional currency called Fic. Now let’s say that China keeps its currency Renminbi’s exchange rate against the Fic at 82, meaning one Fic converts to 82 Renminbi. The allegation would then be that although one Fic should fetch 63 Renminbi, Beijing keeps it deliberately low. The logic is why let the Renminbi trade at its actual price (63) against the Fic if one Fic can buy more Chinese goods because of its lower price.

It is in China’s interest to keep the Renminbi low if it has to retain its primacy as the leading exporting nation. Romney and many others argue that the US exports to China suffer because their Chinese buyers find them much more expensive because of the Dollar-Renminbi exchange rate. Romney’s solution for this is to label Beijing a currency manipulator which in turn would allow his administration to impose new tariffs on Chinese goods coming to America. If the Chinese goods lose their cost advantage, that country’s exports to America would reduce. Nothing hurts China more, goes the logic, than a significant reduction of its exports to its most important market.

On the face of it this appears to be a highly effective way to counter China but once you bring in other factors, particularly the US debt to China, you begin to understand the complications of such an action. China holds $1.15 trillion dollars in US treasury bonds, a number that does constitute powerful economic, and hence geo-political, leverage. I am sure Romney would be mindful of that.

However, it is not as if having been labeled a currency manipulator Beijing would instantly start offloading its US treasury bonds to get even with Washington and in the process send the global economy into a tailspin. Just as Romney has to be mindful of Washington’s debt obligations to Beijing, the latter cannot disregard the fact that it earns tens of billions of dollars in annual interest on the bonds. Last year America paid China $30 billion in interest, according to calculations made by The Washington Post. It is not a number any country would scoff at, even China particularly when it translates into a huge figure in the Renminbi because of the exchange rate.

As a rule a mature moneylender never dispatches musclemen to recover the debt. There are far more effective ways to ensure that not only does the principal remain secure but that the lucrative interest payments keep flowing in. My point is neither the United States nor China can afford to engage in the kind of brinkmanship that is being talked about in the run-up to the presidential election. It is not my case that Romney cannot carry out his threat of declaring China a currency manipulator on the first day of his tenure. It is my case that the aftermath of that action could be serious enough to effectively prevent him from carrying it out in the first place. That said, one can never be sure what being elected US president can do to an individual.

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About chutiumsulfate

South Asians can infer from my name what I am. View all posts by chutiumsulfate

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