An international obsession with the Chinese currency appears to be deflating. This passion began with Japanese accusations that China's undervalued currency was causing its deflation, continued with Europeans blaming it for slow European Union growth, hit full power with a vast US National Association of Manufacturers' campaign blaming it for job losses, and reached its pinnacle when Michigan's governor, Jennifer Granholm, declared she would back a presidential candidate based solely on the issue.
Then reality set in - well, a little bit. Last month, the Japanese, who started the whole thing, refused to back US President George W. Bush's pressure on China. On October 30, the Bush administration admitted that China was not violating rules against currency manipulation. The Federal Reserve Bank has, likewise, published research showing that China is not primarily responsible for US job losses. This latest round of anti-China obsession is now understood to have been rooted in 12 myths.
Myth one: China established its fixed-rate system to undervalue its currency in order to promote exports, thus infringing international prohibitions against manipulating the currency in one direction to create a disguised export subsidy. In reality, when China established its fixed-rate system in 1994, it overvalued the currency, compared with market rates from 1994 through to early last year, as shown by black-market rates and capital flight. From 1997 to 1999, US and other world leaders praised China for resisting market pressures to devalue. Thus, China's fixed rate has overvalued the currency for more than seven years, hurting exports, and undervalued it for less than two years.
Myth two: The Chinese currency is a principal cause of the loss of 2.7 million manufacturing jobs in the US. As Charles Wolf, of the Rand Corporation, has pointed out, when productivity grows faster than gross domestic product, and during recessions, jobs decline. The difference between productivity and growth is such a powerful cause of job losses, without Chinese influence, that there is a mystery why more jobs have not been lost. Many assume that, as manufacturing jobs in the US decline, manufacturing jobs in China rise. In fact, rising productivity leading to the loss of manufacturing jobs is much more powerful in China than in the US. Depending on which figures one uses, the decline of manufacturing jobs in China may be more than 10 times the American loss. All calculations show that Chinese manufacturing job losses are proportionately more severe than in the US.
Myth three: The rise of the service sector at the expense of the manufacturing sector means that Americans are being forced out of high-paying manufacturing jobs and into low-paying service jobs. The reality is that while some workers lose steel jobs and move to McDonald's, the larger trend is higher-paying service-sector jobs squeezing out lower-paid manufacturing jobs.
Myth four: Restricting imports from China would reduce US unemployment. In reality, over recent decades, more protectionist economies like France and Germany have experienced a negligible increase in total jobs, while the more open US has experienced a huge rise in total jobs and achieved unemployment levels about half those of France and Germany. Restricting imports would make America's economy behave like that of France.
Myth five: America faces a manufacturing crisis, caused by competition from China. The reality is that US manufacturing production has soared, decade after decade. Imports from China equal only 5 per cent of US manufacturing.