Should U.S. Deem China A Currency Manipulator?

The Romney campaign has accused the Obama administration of being too soft on China. Critics of China's trade policy say Beijing keeps its exchange rate artificially low in order to make Chinese products cheaper than products made in the U.S., thus giving China an unfair trade advantage. President Obama, like his predecessors, has declined to identify China officially as a "currency manipulator," saying that designation would have no beneficial effect and could spark a new trade war. Governor Romney says he would reverse that policy on his first day in office. We take a look at what that would mean.

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MELISSA BLOCK, HOST:

Now, to another issue that could come up in tonight's debate and that's whether the Obama administration is too soft on China. Under law, the Treasury Department is required to identify countries that manipulate their currencies for a trade advantage. The Obama administration has not yet put China in that category. Governor Romney says that's not right.

MITT ROMNEY: And when their prices are low and then they compete with our manufacturers, our guys go out of business and people lose jobs. And that's why one thing I will do from day one is label China a currency manipulator. They must not steal jobs in unfair way.

BLOCK: That was from a campaign speech last month, and Governor Romney makes that pledge regularly. NPR's Tom Gjelten is here now to put this issue in context for us. And, Tom, walk us through this a bit. How does a low currency exchange rate become a trade advantage for China?

TOM GJELTEN, BYLINE: Well, Melissa, take a company in China that makes toasters. It uses Chinese money, the yuan, to buy the parts it needs to pay its workers. So let's say it's producing that toaster for about 30 yuan. Now right now, 1 yuan is only worth about 16 cents. So that company can sell that toaster at Wal-Mart for about $5 and break even. American companies can't match that price. But the Chinese company can produce that toaster for $5 only because the yuan is deliberately undervalued. If the Chinese government can keep that exchange rate low, Chinese companies will beat out their American competitors every time.

BLOCK: And is that what's happening?

GJELTEN: To an extent, yes. I mean, Beijing has allowed the yuan to go up in value in the last year or so, so it's a less of a problem now than it was before. But the yuan is still cheap, and that does give China a trade advantage. And Governor Romney's view is China should be held accountable for that practice.

BLOCK: And again, that pledge from Mitt Romney to hold - to call China a currency manipulator on day one, what would the effect of that be? What would it mean?

GJELTEN: You know, in practical terms, it's basically just name-calling. I mean, officially, it would mean the U.S. has to begin negotiations with China over its currency, and at some point down the road, if those negotiations are not successful, the U.S. could punish China with tariffs, but it wouldn't be automatic. And here's the thing, it's not like this would set in motion some negotiations that aren't already taking place. There have been discussions over the exchange rate ongoing with China now for several years, beginning under President George W. Bush. So this would largely be a symbolic move.

BLOCK: A symbolic move. But there are a lot of people who say there may still be a very powerful reaction from China.

GJELTEN: Well, one of the things you have to worry about is that China would retaliate and then we'd have a trade war. In any case, China is likely to take offense. Remember, Governor Romney says he would do this on day one. There's a concern that that put the Romney administration on a bad footing with China. As serious as this currency problem is - and it is serious - it's not the only issue around which the U.S. needs cooperation from China. There are concerns abut protecting intellectual property, concerns about sanctions with Iran, North Korea. So there is some concern that this could cause problems in those other areas.

BLOCK: Tom, the last time that the U.S. did declare China a currency manipulator was in 1994. And 18 years ago, of course, China was a very different country. What happened after that?

GJELTEN: That was a time with a lot of trade tensions, Melissa. Actually, '94 was not the first time. Before that, they did it in '93. They did it in '92, and there was a feeling that it was just going nowhere. It was counterproductive. It made things worst. That's why the George W. Bush administration and the Obama administration decided it wasn't a good road to go down.

BLOCK: A number of U.S. business leaders, also a number of Republican leaders, have said they oppose declaring China a currency manipulator. Do you think that Mitt Romney would actually go ahead and do this or is this campaign bluster?

GJELTEN: Well, you know, at this point, he said it so many times. It would be hard for him not to keep that promise. But there could be a situation where you declare China a currency manipulator and then just let it go with that. So, you know, move on to other issues. That's probably more likely. But you're absolutely right. The whole business community from the Chamber of Commerce on down doesn't think this is a good idea.

BLOCK: OK. NPR's Tom Gjelten. Tom, thanks so much.

GJELTEN: Thank you.

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