The United States and China seem to have reached an agreement with regard to the exchange rate between their two currencies. The agreement is that the U.S. government will stop yelling about it, and China will do whatever it wants to do, which will probably include some modest rise in the renminbi some time in the near future.
This agreement was seen in the statements from both parties during the nuclear summit held in Washington over the past few days. “China rightly sees the issue of currency as a sovereign issue,” said President Obama in response to a question about his meeting with President Hu Jintao of China. Stating more of what should have been obvious from the beginning of this dispute, he added, “They are resistant to international pressure when it comes to them making decisions about their currency policy and monetary policy.”
President Hu concurred, saying that a change in the exchange rate “won’t be advanced by any foreign pressure,” which we also knew.
The Chinese government probably wants to let their currency rise at least somewhat anyway, since the authorities there are worried about inflation. An appreciation of the renminbi will help them lower inflation, by lowering import prices.
On the other side, Washington has never been serious about trying to lower the value of the dollar in general. As has been well-documented as well as demonstrated throughout the bubble years and the recent meltdown, the U.S. government is dominated by Wall Street. And Wall Street is not interested in a more competitive dollar; quite the opposite. The financial interests almost always prefer a stronger dollar, since it lowers inflation and makes their overseas acquisitions cheaper.
They do not care about the millions of manufacturing jobs that we have lost, or increasing employment with a more competitive exchange rate. In fact, our government seems to have relatively little commitment to reducing unemployment in general in the wake of the country’s worst recession since the Great Depression.
The Obama Administration forecasts unemployment of 10.0, 9.2, and 8.2 percent, respectively, for 2010-2012. Unemployment is not projected to fall to the 5.2 percent rate considered to be full employment until 2018. This of course does not count the millions of people who are involuntarily working part-time or have left the labor force.
Given that there are relatively inexpensive ways to reduce unemployment in the United States, such as government subsidies for work sharing, we can only conclude that this is not a top priority under the current government. And of course the dollar is overvalued against a whole range of currencies, not just China’s — and there seems to be no interest among our policy makers in bringing it down.
So while it is good that the Obama Administration has discovered that public pressure will not move China to revalue its currency, it is also unlikely that there is much pressure coming from Washington behind the scenes. More likely, the Obama Administration will use the public demands around the currency as a bargaining chip for things that it really cares about, such as getting China — a permanent member of the UN Security Council, with a veto — to agree to stronger sanctions against Iran. (This is one reason why China-bashing in the U.S. is not a good political strategy — it takes the heat off our own government, which is the one most responsible for maintaining an overvalued dollar).
With regard to these sanctions, the Chinese are unlikely to concede anything significant. China has rejected any kind of wide-ranging sanctions in the past, for good reason. Increasing sanctions against Iran, as President Lula da Silva of Brazil has emphasized, would simply bring us another step closer to military conflict. China does not want this, and not only because — as the media emphasizes — they do not want a disruption of Iran’s oil supplies. The Chinese understand that the showdown between the U.S. and Iran — like the prior showdown that led to war with Iraq — is not so much about any potential weapons program but about power. Iran, a major oil producer and one of the largest countries in the area, is naturally going to have influence in the region. This is what Washington is really against, and what obstructs the United States from negotiating an agreement with Iran that would resolve the nuclear issue.
China has no interest in U.S. efforts to try to “isolate” Iran — China would never invite countries from all over the world to a conference on securing nuclear materials and exclude Iran, as the United States has just done. Nor is China “isolated” in its own views on Iran: Current Security Council members Brazil and Turkey oppose new sanctions on Iran and support renewed efforts to resolve the U.S.-Iran conflict through diplomacy. Like most other governments, China appears to favor a more multi-polar world in which the United States’ “super-power” status is less of a license to tell other countries what to do.
Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, D.C. He received his Ph.D. in economics from the University of Michigan. He has written numerous research papers on economic policy, especially on Latin America and international economic policy. He is also co-author, with Dean Baker, of Social Security: The Phony Crisis (University of Chicago Press, 2000) and president of Just Foreign Policy. This article was first published by the Guardian on 15 April 2010 and republished by CEPR under a Creative Commons license.