Friday, January 23, 2009

Don't Worry About Geithner's Words on China's Currency

The Financial Times appears to be freaking out over words contained in Tim Geithner's written responses to questions from the Senate Finance Committee, saying that they are bound to "anger China".
In a written response to questions from senators, Mr Geithner, whose nomination was supported on Thursday by a clear majority of the Senate’s finance committee, said: “President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency.” Mr Obama would “use aggressively all the diplomatic avenues open to him to seek change in China’s currency practices”, he said.
What is meant by "manipulating"? If he means that China exerts control over how far the currency is allowed to float, he is absolutely right. Any economist who doesn't agree with that statement simply hasn't been paying attention.

Also note that Geithner says President Obama will use all diplomatic avenues to address the situation. Correct me if I'm wrong, but sanctions and trade protectionism (the presumed punishment for such "manipulation") are economic avenues, not diplomatic.

And if you're not buying that argument, I have another. Not only is Geithner not the Secretary of the Treasury yet, but he is (or at least was at the time) being criticized for not having paid taxes at some point in the past. The nominations of potential cabinet secretaries have been sunk for much less than that in the past. (Anyone remember Zoe Baird?) Geithner, of all people, knows he needs to say what the Senators want to hear if his nomination is to be confirmed.

My point here is that we should take the words of as-yet-unconfirmed cabinet secretaries only as seriously as we take campaign rhetoric. Geithner, like President Obama during his campaign, wants a job that he does not yet have. Appearing to be tough on China is always part of a good campaign strategy in the United States.

Once people win elections or confirmations, they then become responsible for doing a good job. Often the practicality of leading a country negates the necessity of following-through on campaign rhetoric.

Today's Wall Street Journal has a little more balanced account of Geithner's responses:
Yet while the yuan is an "important piece" of the economic dialogue with China, Mr. Geithner said the "immediate focus" has to be on spurring domestic demand in both China and the U.S.

"The immediate goal should be for us to convince China to adopt a more aggressive stimulus package as we do our part to try to pass a stimulus package here at home," Mr. Geithner wrote.

In fact he stressed that all of the U.S.'s trading partners would have to inject financial stimulus into their economies.

"If such plans fail to materialize, a slowdown in worldwide demand will ensue, exacerbating the downturn both here in the U.S. and abroad," Mr. Geithner said.

He's already giving himself a very good reason for not hounding China on its currency. Of course, that assumes China intends to play ball.


  1. I think you are right on point with this post. It's real easy to take Geithner's words and interpret them as a foreboding sign of potential protectionist measures by the Obama administration. In the end he has to do what's best for the country, and it does not take a genius to realize that sanctions and protectionism will not get the US out of this economic turmoil. Excellent post and congrats on the mention in the WSJ. I have been reading your blog ever since Dan at the China Law Blog wrote about ChinaBizGov and really enjoy what you have to say. Keep up the excellent work.

  2. Thanks for your comments and encouragement Joel. Also thanks for letting me know about the WSJ mention. I'm happy to know that my contrary view on this is getting a little airtime. Let us hope cooler heads will prevail.


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