U.S. Treasury Secretary John Snow is in China for a nine day visit. But which nation’s leader is offering supply-side economic advice? If you guessed Chinese President Hu Jintao, you are correct. Citing evanescent “imbalances,” Snow continues his calls for de-linkage of the yuan from the dollar and subtly still pushes for a major yuan appreciation. The U.S. thus inexplicably continues its weak dollar currency policy. Hu, on the other hand, believes that “All countries, major economies in particular, should keep major currencies reasonably stable and prevent trade protectionism.” Bingo.
Over the past decade, the dollar-yuan link has been a key source of growth and stability not only for the U.S. and China but also across the global economy. China’s trade policies have not always matched Hu’s positive free trade rhetoric, but at least they have made their stance clear and can now be called to account. The U.S., however, damages its own free trade credibility when it muddies the waters with monetary protectionism and tariff threats. China is not likely to substantially revalue the yuan for a number of both internal and external reasons: an overly strong yuan would hurt not just the overall Chinese economy but especially its rural farmers in the country’s interior, where Beijing is focused on improving incomes relative to the coast. Deflation would reduce commodity prices and thus farm income, exacerbating income differences with the fast-growing coastal free zones.
Money is a store of wealth, a standard of value, and a unit of account. Change its value, and you change every relationship across the economy. In the short run some will win and some will lose. But in the medium and long term, everybody loses. The value of money should not fluctuate freely at every arbitrary geographic border. In an economy, money and law should be stable. Everything else should be dynamic.
With a few days left in his Asian trip, hopefully Secretary Snow will second Mr. Hu’s call for stable money and free trade.