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Greenspan comes out strongly AGAINST using tariffs to punish China:

Greenspan trashes yuan consensus
Barry Sergeant
Posted: Thu, 23 Jun 2005 17:11 / © Moneyweb Holdings Limited, 1997-2005


Alan Greenspan, chairman of the Federal Reserve, the US central bank, has thrown cold water on the huge school of thought insisting that China revalue its currency, the renminbi.

On Thursday, Greenspan told the committee on finance of the US Senate that he was aware of “no credible evidence” that a revaluation of the renminbi would “significantly increase manufacturing activity and jobs” in the US.

Greenspan’s observations stand in savage contrast to the conclusions of a US Treasury report published on May 18, which lashed out at China, with a key focus the decade-long peg of the yuan, the underlying unit of China’s renminbi currency, to the dollar. The report stated that “current Chinese policies are highly distortionary and pose a risk to China’s economy, its trading partners, and global economic growth.”

In a statement accompanying the report, US Treasury secretary John W Snow reinforced the accusations, charging that “China's rigid currency regime has become highly distortionary. It poses risks to the health of the Chinese economy, such as sowing the seeds for excess liquidity creation, asset price inflation, large speculative capital flows, and over-investment.”

When the yuan was pegged to the dollar a decade ago, at 8.277 yuan to the dollar, the greenback entered a bull market that fizzled out with a vengeance early in 2002. A weak currency tends to enhance the competitiveness of exporters, and with the yuan peg to the dollar, traditional analysis has argued that Chinese exports became ever more keenly priced in world markets as the dollar started its protracted, broad bear market just over three years ago.

Speaking out on Thursday against protectionism, Greenspan argued that in order to maintain a rising standard of living, “a dynamic economy” such as seen in the US required “a continual shifting of resources toward the most up-to-date technologies, financed not only by savings but also importantly by the depreciation of increasingly obsolescent facilities.”

This highly dynamic process, Greenspan explained, was mirrored in US labour markets, where jobs are “constantly being created and destroyed at a rapid pace.” New jobs in the US currently average more than a million a week - half resulting from voluntary job changes. At the same time, during a typical recent week, about 150 000 workers are temporarily laid off and another 225 000 are subject to permanent job loss.

“Any effect of trade with China on US employment,” stated Greenspan, “is likely to be very small relative to the scale of job creation and job loss in our economy.” According to Greenspan’s analysis, an increase in the exchange rate of the renminbi, relative to the dollar, would likely redirect trade within Asia, reversing to some extent the patterns that have emerged during the past half-decade. However, Greenspan added that a revaluation of the renminbi would have limited consequences for overall US imports, as well as for US exports that compete with Chinese products in third markets.

“Such a revaluation,” argued Greenspan, “would affect Chinese value added but not the dollar cost of intermediate goods imported into China from the rest of Asia, which represents a significant share of the gross value of Chinese exports to the US and elsewhere. (To the extent that exporters to China revalued as well, of course, the impact on overall Asian exports would be somewhat greater.)”

Greenspan added that more generally, any significant elevation of tariffs that substantially reduces overall US imports, by keeping out competitively priced goods, would materially lower US standards of living. A return to protectionism would threaten the continuation of much of the “extraordinary growth in living standards worldwide,” Greenspan argued, but especially in the US, that is due importantly to the post-World War II opening of global markets.

The US Treasury report stopped short of charging China with manipulation of its currency. However, Snow said “it would be a mistake to interpret this conclusion as acquiescence with the foreign exchange policies of many of America's trading partners.”

http://www.moneyweb.co.za/news/eco_trends/454237.htm