In the third and final presidential debate, Governor Romney said he would declare China a “currency manipulator” if he were to become President. Although the approach of the election is heating up the rhetoric, what would be the economic impact?
Declaration of currency manipulation would be followed under current law by negotiations between the Treasury Department and China to develop a more market-driven currency. Considerable push back can be anticipated and a trade war is a real risk, but a higher value of the yuan would help U.S. companies be more competitive vis-à-vis Chinese firms both domestically and abroad. U.S. consumers could benefit through increases in jobs and/or wages. All Americans would ultimately benefit from a reduction in global trade imbalances, which require the U.S. to be dependent on large capital inflows and have led to more than $1 trillion of holdings by China.