Everyone has waited with some nervousness to see if Treasury Secretary Tim Geithner would accuse China of currency manipulation next week, when he intended to issue a report to Congress on exchange rate policies. Paul Krugman has a nice explanation of why this currency controversy is important: Not because of the U.S. fiscal situation but because China wants to keep its export-oriented economy in artificial full-swing, which hurts other economies' trade policies -- including the U.S.' but also other developing countries' -- by preventing them from competing on a level playing field. However, just like a student with a term paper (or a journalist with a malleable deadline), Geithner has announced he is putting off his report until after a series of trade-related meetings scheduled through May and June. However, he's still trying to get the Chinese to shake a leg:
Surplus economies with inflexible exchange rates should contribute to high and sustained global growth and rebalancing by combining policy efforts to strengthen domestic demand with greater exchange rate flexibility. ... Now, however, China’s continued maintenance of a currency peg has required increasingly large volumes of currency intervention. Additionally, China's inflexible exchange rate has made it difficult for other emerging market economies to let their currencies appreciate. A move by China to a more market-oriented exchange rate will make an essential contribution to global rebalancing.
Giving China a chance to further shift its policies before the report -- which, if it declares China a manipulator, will have policy consequences as the U.S. seeks to sanction China and respond with its own shifts -- is probably a good idea. But any sign that the administration is dilly-dallying simply to avoid a tough decision, rather than to gain a better position, will be taken advantage of by the Chinese government.
Critically, the U.S. doesn't want a scrap over currency to become problematic in other areas where the U.S. desires Chinese cooperation. (Clive Crook had adopted this position, noting fairly that executing a real push for Chinese accountability would be difficult.) But, like Krugman, I believe the U.S. ought to take a harder line on this issue; our economic future is at stake. Pushing to improve the U.S. export sector would also be a nice political move for the administration in a time when jobs are at a premium.
-- Tim Fernholz
