September 12, 2010 Reading Time: < 1 minute

REVIEW & OUTLOOK —

A bipartisan swarm pounded Treasury Secretary Timothy Geithner on Capitol Hill yesterday for not doing enough to stop China’s supposed money mischief. The sessions made clear that pressure is building to impose punitive tariffs on Chinese goods if the yuan doesn’t appreciate in value. While it’s true that China’s monetary policy is causing problems, the yuan is the wrong target and protectionism is the wrong tool to get Beijing to cooperate.

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First off, pegging the yuan to the dollar is not “currency manipulation” or “stealing American jobs.” Hong Kong, Estonia and Bulgaria have fixed exchange rates and no one accuses them of underhanded tactics. But under their currency-board systems, inflows of foreign exchange directly lead to an increase in the money supply, and hence rising prices. That tends to constrain trade imbalances.

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Priscilla Tacujan

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