^{Democracy & Technology Blog} Be careful, Ben

This news proves our point of just how risky it is for someone of Ben Bernanke’s deservedly high stature to get in the middle of a currency/trade debate.

Mr. Bernanke dropped … references in the original text of his speech that called China’s suppression of the yuan’s value an “effective subsidy” for firms that “focus on exporting rather than producing for the domestic market.” The chairman had used the word “subsidy” to describe China’s currency practices three times in the written text, which was released before his appearance and posted to the Fed’s Web site.
…
But with the specter of the mushrooming U.S.-China trade imbalance hanging over the talks, Mr. Bernanke’s flirtation with the term “subsidy” took on heightened political and legal significance. Many lawmakers, manufacturers and labor unions accuse China of cheating in foreign trade — and effectively subsidizing its exporters — by preventing the yuan from rising further and faster. A weak yuan makes American goods and services relatively expensive, and Chinese products relatively cheap.
Chinese officials say that stability in the yuan’s exchange rate provides important benefits to their economy, and that they are committed to allowing market forces to play a greater role over time. The currency has increased just 5.8% against the dollar since the Chinese authorities first allowed it to move in July 2005, and Mr. Bernanke sided with those who say its value is far below what would be set by a free market.
If it concluded that China is subsidizing exports through its currency policies, the Bush administration could well be forced to take punitive measures against China at the precise moment it is undertaking a government-wide effort to improve U.S.-Chinese economic relations. The Treasury Department, for instance, would come under intense congressional pressure to declare China a currency manipulator in its semiannual foreign-exchange report. Mr. Paulson is already two months late with the next report, which was due Oct. 15.
Furthermore, the administration might find itself obliged to bring a trade case against China for violating international rules against export subsidies.
Treasury and Fed officials denied that Treasury had brought any pressure to bear on Mr. Bernanke to modify his language. “It was a spontaneous decision to enhance the clarity of that sentence,” said Fed spokeswoman Michelle Smith. The Fed is fiercely protective of its independence from political Washington.

If a weak currency can be defined as an illegal subsidy, the U.S. is indicting itself.
-Bret Swanson