The Dropping Yuan and Manufacturing in the United States

By December 5, 2008Trade

The United States has learned its historical lessons and will avoid going down the path of the depression-deepening Smoot-Hawley and protectionism as it counters the current recession. Surely it has.

But given the new global economy, more integrated and competitive than in the 1930s, the United States is not the sole determiner of economic policies. Maybe this time around, it’s China that makes the mistake of enacting its version of Smoot-Hawley, a foolish, domestically targeted policy that sparks a trade war.

From Reuters, “Yuan drop extremely disturbing“:

WASHINGTON, Dec 4 (Reuters) – A sudden drop this week in the value of the Chinese yuan <CNY=CFXS> could reignite political tensions over the huge U.S. trade deficit with China, U.S. business groups said on Thursday.

“This is extremely disturbing,” Frank Vargo, vice president for international economic affairs at the National Association of Manufacturers, told Reuters as U.S. Treasury Secretary Henry Paulson and other senior Bush administration officials were in Beijing for high-level economic talks.

The yuan’s drop came just days before that meeting and just a little more than one month before President-elect Barack Obama takes over in the White House.


This news comes just as the fifth U.S.-China Strategic Economic Dialogue wrapped up. Secretary Paulson did not address the issue in his formal closing remarks, saying later that China remains “committed” to continued appreciation of the currency. And trade is not ONLY currency.

From Paulson’s closing statement:

As in the past, we discussed the importance of domestic-led growth, and the importance of a market-determined currency in promoting balanced growth in China that will contribute to a healthy global economy. I welcome the steps announced by the Chinese to further open their financial markets, such as allowing foreign banks to trade bonds on the same terms as Chinese banks. Strong financial markets will enable healthy economic development across China.

Protectionist sentiments grow during periods of economic downturn. We recognized this, and reiterated our commitment to fight protectionism, because open trade and investment are in the best interest of our people. Both nations reiterated the importance of completing a successful Doha round and meaningful progress toward that goal by the end of this year. The Chinese economy, like the US economy, depends on global trade, and China is stepping up its efforts to promote global growth and stability. I am particularly pleased to support China’s membership in the Financial Stability Forum, which is charged with facilitating action on many of the global stability commitments endorsed by the G20 last month. To support trade flows during this period of financial turmoil, the US and China announced today that our two Export-Import Banks will make available an additional $20 billion for trade finance, particularly for creditworthy importers in developing economies. This effort should support over $38 billion in annual financing for exports from the US and China, and will benefit the global economy. Finally, global trade depends on the confidence of consumers in the safety of the products they buy. Again during this meeting of the SED, the US and China deepened cooperation on product safety and food safety protocols.

More from Treasury on the SED:

  • Opening Remarks
  • Statement at the EcoPartnerships Signing
  • U.S. Fact Sheet
  • U.S.-China Fact Sheet
  • More on the SED
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