The US currency bill could bring back jobs - but at what price?

US sentiment on China’s currency often springs from feelings of vulnerability – that China has the upper hand and is exploiting America’s lazy, shopaholic tendencies to keep its renminbi undervalued and export industries strong. The current expression of this feeling of weakness is the currency bill, designed to punish exporters in countries that keep their currencies artificially low, now wrangling its way through the US legislative process.

Many respected economists have argued that the US obsession with the renminbi exchange rate is based on a flawed understanding of the Sino-US trade relationship, and this magazine concurs. Others express equally valid concerns that the bill could provoke a destructive trade war; also true. But some have gone so far as to imply that a stronger renminbi offers no potential benefit to the US economy. Critics say low-wage manufacturing jobs are unlikely to return to the US; this is a jobs bill for Vietnam, Indonesia and Mexico.

Not exactly. The difference is the way Vietnam, Indonesia and Mexico treat their dollars. As a rule, these countries reinvest the US dollars they obtain from trade in other goods and services, creating economic growth domestically and ultimately in the economies of their trading partners, including the US.

Trading with China does not deliver the same benefit. To keep its currency stable and tight capital controls in place, the central bank stockpiles them instead – and by stockpiling them in the form of US Treasury Bonds, it helps keep US interest rates lower than they should be, with consequences now clear to all.

Not another Cold War

This is not an endorsement of the bill, however. Republican presidential frontrunner Mitt Romney has said that the US and China are already in a trade war. Perhaps, but as in other wars, escalation is rarely the road to peace.

The work to dismantle tariffs and barriers to trade between China and its trading partners has been one of the great triumphs of the last century, and it has improved welfare around the globe. For all the flaws in this process of interlinking the world’s two largest economies, a more confrontational alternative is no alternative.