Why the Fuss Over the Pegged Yuan-Dollar Rate and not Other Currencies?
This question comes from Tom Nugent writing for the National Review:
One would think that the Chinese were doing something illegal. But in reality, many countries do exactly what the Chinese are doing, and yet Congress could care less about these other currency “manipulators.” In fact, in targeting China alone, one wonders if some members of Congress strictly have a beef with China.
Let’s help Mr. Nugent out with some information from the Federal Reserve as to certain exchange rates as well as the currency trade weights. For 2005, the total trade weight for China is 11.345% ranking as the third highest behind the Euro area (18.802%) and Canada (16.434%). Japan’s weight is 10.581%, Mexico’s is 10.004%, and the UK’s is 5.169%. These six nations or regions account for 72.3% of our trade with the Euro, Canadian dollar, yen, peso, and pound all floating with respect the dollar. The next significant currency that is fixed to the U.S. dollar is that Malaysian Ringgit whose weight is 2.24%. So the reason for being concerned with the yuan more than currencies such as the Venezuelan Bolivar has to do with the extent of trade with China.
Mr. Nugent rightfully objects to the claim of currency manipulation. Fixed exchange rates are not necessarily manipulation just as their being technically legal is not a statement that a fixed exchange rate regime is optimal. On the one hand, I am puzzled why the National Review is on this fixed exchange rate campaign. On the other hand, any politician who thinks a floating yuan will make a large dent in the U.S. current account deficit is sadly mistaken.
Update: the second comment from AB reader Tim Bassatt reminds us of managed floating. Thanks Tim!