Foreign currency

Foreign currency

Last week the House sent a message to China. It passed a bill that would allow a nation’s currency policy to be factored into decisions on trade tariffs. The risks of protectionism for U.S. businesses and consumers.


  • C. Fred Bergsten Director of the Peterson Institute for International Economics and author of "China's Rise."
  • Ambassador Thomas Niles Vice chair, United States Council for International Business; former U.S. ambassador to Canada, Greece and the European Union; former assistant secretary of state for Europe and Canada under President George H.W. Bush.
  • Kenneth Lieberthal Senior fellow and director of the John L. Thornton China Center at The Brookings Institution; former senior director for Asia at the National Security Council under President Clinton.


  • 10:06:55

    MS. DIANE REHMThanks for joining us. I'm Diane Rehm. The U.S. Senate is considering a trade bill similar to one passed by the House last week. It's aimed at addressing currency manipulation by China and other countries, which many believe harms U.S. competitiveness. Joining me in the studio to talk about currency reform and trade policy, C. Fred Bergsten of the Peterson Institute for International Economics and Kenneth Lieberthal of The Brookings Institution. Joining us by phone from New York, former Ambassador Thomas Niles of the U.S. Council for International Business. We do welcome your calls throughout the program. Join us on 800-433-8850. Send us your e-mail to As you can tell, I am still recovering from my latest voice treatment. I assure you it is not throat cancer, as some have asked. It is spasmodic dysphonia. I was treated two weeks ago. It will get better. Good morning, gentlemen. Thanks for joining me.

  • 10:08:37

    MR. C. FRED BERGSTENGood morning, Diane.

  • 10:08:37


  • 10:08:40

    REHMFred Bergsten, let me start with you. Explain the bill that the House passed and what it would do.

  • 10:08:50

    BERGSTENThe issue is Chinese manipulation of their exchange rate against the dollar. The Chinese intervene massively in the currency markets to the tune of about $1 billion every day for the last five years. They buy dollars to keep the price of the dollar high, keep the price of their currency low. That, of course, then improves their competitiveness in international trade. It acts like a huge subsidy for all their exports at a high tariff on all their imports. So it's a huge distortion of trade. It's a massive protectionist measure. Estimates vary on how big that effect is. My own estimates, based on a lot of in-depth research, is that it's at least 20 percent -- some say as much as 40 percent -- but it's high. And it clearly does inflate very greatly China's massive trade surplus, and it helps our trade deficits stay very high, which among other things, takes jobs away from the United States.

  • 10:09:56

    BERGSTENWhat this bill would do is authorize the U.S. government to treat that currency manipulation as an export subsidy for purposes of applying countervailing duties -- countervailing duties or tariffs that, under international rules, countries can apply when other countries unfairly subsidize their exports and thereby steal market share. Currency undervaluation has not heretofore been regarded as an export subsidy for purposes of applying these duties. The new bill would authorize doing so, but the key word is authorize. The bill itself would not apply any tariffs. If the bill were to pass -- and there are many steps left in the process -- then individual industries would come into the U.S. government, petition for duties to protect their industry on the grounds that the currency undervaluation was a subsidy and that their industries were being injured as a result. The U.S. government would then go through an elaborate process, figure out if that was right. If it passed muster -- if the petition passed muster, the countervailing duties would go on, but that's not the end of the process.

  • 10:11:12


  • 10:11:12

    BERGSTENBecause then the Chinese, if they were the target, could conclude that the U.S. had itself not acted fairly under the international rules and could take the United States to the World Trade Organization in order to get redress and insist that the U.S. undo the duties. Then it would go through a WTO process, and the whole thing would spin out over quite a period of time.

  • 10:11:37

    REHMYeah, it sounds as though it would take years to carry that through.

  • 10:11:42

    BERGSTENIf the Chinese did protest U.S. action under such a law, the whole process could easily take two or three years. In the meanwhile, the countervailing duties would be in place because the U.S. would have put them on. There would be a deterrent to trade. The underlying objective of this, of course, is not to apply new duties and restrict trade. It's to help persuade the Chinese to let their exchange rate go up substantially. That's the objective of the exercise, and that's really the $64 trillion question.

  • 10:12:15

    REHMSending a message to the Chinese. Ken Lieberthal, would it do so?

  • 10:12:22

    LIEBERTHALI think the Chinese recognize that this would be taking a popgun to kill an elephant. As Fred explained, this does not apply countervailing duties across the board. Cases had to be brought one at a time. Each generates a lot of government analysis and review that's required. And a case can be brought only if you can allege that the Chinese actions are causing harm to an industry currently in the United States. But, of course, a lot of Chinese exports to United States are not competing with goods produced domestically here, so we have no way to get at those. So this is really small scale. I think the Chinese would take this as a problem, but they'd see it more as a political problem than an economic problem, see it as a measure of the level of political concern about our trade balance. I think, frankly, this is a rather poor way of getting at that issue, and it would not do much on its own. But the Chinese certainly would be very unhappy to see it become law.

  • 10:13:28

    REHMTom Niles, would, in fact, this bill help American business and industry?

  • 10:13:38

    AMBASSADOR THOMAS NILESWell, no. I don't think it would help at all. First, let me say, I don't think there's any question that the Chinese are manipulating their currency for trade advantage. Even the Chinese recognize in their own statement that they're doing this. And surely I agree with Mr. Bergsten that the renminbi is heavily undervalued, perhaps 20, 25, 30 percent, and it is having a major distorting impact on international trade. But the thing we do not want to do, I believe, is to turn what is essentially a problem of China versus the rest of the world into a U.S.-China bilateral issue, which I think this legislation would do. It also -- I agree with Mr. Lieberthal that it would not significantly help U.S. business. It would divert some Chinese exports now coming to the United States to other low-cost countries like Mexico, Vietnam, Indonesia, et cetera But -- and we might conceivably have a lower trade deficit as a result, but it would not have a major impact on production or employment in the United States.

  • 10:14:52

    AMBASSADOR THOMAS NILESWhat we need to do now -- and this is happening by the way -- is to find ways to multilateralize the pressure on China to do the right thing, which ultimately is in the interest of China. I might just note that just today in Brussels, the Chinese Premier Wen Jiabao met with the European Union leaders and was told that China should allow, "an orderly, significant and broad-based appreciation" of the renminbi. And I see on the front page of this morning's Financial Times that the Institute of International Finance, which is an organization grouping about 400 major banks around the world, has essentially called for the same thing. So the Chinese have the message. There's no question about that. Prime Minister Wen Jiabao got it from President Obama last week in New York at the U.N. And I think this will be the center of the IMF-IBRD...

  • 10:15:52


  • 10:15:52

    NILES...annual meetings, which take place in Washington at the end of this week, So we need to be a little patient and not turn a multilateral issue into a bilateral U.S.-China trade spat.

  • 10:16:06

    REHMSo, Fred Bergsten, is China getting the message?

  • 10:16:11

    BERGSTENIf so, they're getting it painfully slowly. I fully agree with Ambassador Niles. This is a global concern about China's manipulation. It should be handled through multilateral channels. The discouraging note is that there have been efforts of that type for at least five years. In the International Monetary Fund, in the G20 throughout its two years of summits, the whole rebalancing concept is aimed at China reducing its big trade surpluses, the U.S. no longer relying on debt-lead -- debt -- finance consumer-led growth but rather having more investment and a stronger trade balance.

  • 10:16:52

    BERGSTENThe Chinese have said all the right things about participating in that project and adjusting their policies accordingly. But it's been painfully slow to implement anything. The exchange rate is not, by any means, the whole of this strategy, but it's essential -- an essential part. And they have not let the currency go up more than a miniscule amount, and that's what has really led patience to go so short. I testified at both Senate Banking Committee, House Ways and Means Committee on this three week ago, which triggered now this Congressional action we're talking about. And the level of patience and tolerance has literally, I think, come pretty close to running out.

  • 10:17:34

    REHMBut, Fred, what about Ambassador Niles' comment that what we might be doing is making this a bilateral confrontation as opposed to seeing it from the broader world perspective?

  • 10:17:54

    BERGSTENI think that's absolutely correct, and I think the administration will use the initial Congressional steps to try to rally that multilateral coalition to deal with China. The Europeans, the other emerging markets, certainly do not want the U.S. to start applying new trade barriers because after all, countervailing duties could apply to them as well as China. So, hopefully, this legislative effort would mobilize the international coalition to which I think the Chinese would listen more clearly.

  • 10:18:24

    REHMFred Bergsten, he is director of the Peterson Institute for International Economics. Do join us, 800-433-8850.

  • 10:20:03

    REHMAnd we are talking about China's currency, how it's fluctuated and how the U.S. House of Representatives has passed a bill that would begin the process of imposing some kind of penalty on China for continuing to manipulate its currency. It would be a very long process. Here in the studio, Fred Bergsten. He is author of "China's Rise" and director of the Peterson Institute for International Economics. Ken Lieberthal is with The Brookings Institution. And on the line with us, Ambassador Thomas Niles. He is vice chair of the U.S. Council for International Business. Just before the break, Ken Lieberthal, I know you wanted to comment on Fred Bergsten's statement.

  • 10:21:10

    LIEBERTHALYes, the issue was to what extent the U.S. should push to make the pressure on China multilateral rather than make us the point of the spear on this issue. And I just want to comment that many Chinese see the U.S. now as engaged in a wide-ranging effort to stop China's rise because we're the preeminent power in the world. We, in their view, cannot tolerate another power rising to a roughly coequal status. And so they attribute evil motives around this kind of logic to a lot that the U.S. does. That simply reinforces the virtue of our making this a multilateral effort and not being the point of the spear on it because when India, Indonesia, Brazil and others join in the pressure on China, then this makes it a more legitimate issue on the Chinese.

  • 10:22:05

    REHMBut how likely is China to respond?

  • 10:22:10

    LIEBERTHALI think the Chinese will respond, but I think they'll respond gradually. Our image of the Chinese economy -- the popular image is it's just booming along, and these guys are in a tremendously enviable position. Their image of their economy is they've got problems everywhere. They face a lot of social instability. They're very worried about unemployment. And with the succession coming up in China, everyone is afraid to rock the boat. So you get a lot of cautious reaction there rather than bold reform and bold initiative. So I think they will move the value of their currency up. I think it's going to be much more gradual than it should be, and we would like it to be. But that's where their politics take them.

  • 10:22:52

    REHMIs there any danger, Tom, that you see, of a trade war emerging from the House bill?

  • 10:23:04

    NILESWell, if we were to impose countervailing duties against a Chinese product -- assuming this bill is passed by the Senate and signed by the president and then we go through the process that Mr. Bergsen described, a long and complicated one, we imposed a countervailing duty on some Chinese product -- the Chinese are certain to take us into the WTO on this because, I mean, it's just a logical move for them. They could also respond in the same way they responded when we imposed dumping margins on Chinese tires sometime back. And they responded by imposing dumping margins on U.S. exports to China of frozen chicken parts. And they recently increased that duty to over 100 percent of ad valorem, alleging that we subsidized our chicken production in the United States, which may or may not be true. But that's the kind of thing you really don't want to get into.

  • 10:24:09


  • 10:24:09

    NILESAnd I must say I agree very much with Mr. Lieberthal about the Chinese attitude on this, the Chinese view of the United States. And to the extent we can use multilateral institutions, I agree with what Mr. Bergsten said that it has been a disappointing process. And the IMF has been involved with this issue now for many years, five, 10 years -- five years at least. If we can use these institutions and get other countries to step forward -- get India, get Vietnam, get Brazil and others to step forward on this -- we have a much better chance, ultimately, of achieving the objective.

  • 10:24:50

    NILESWe also need to make clear to the Chinese if we can -- I think we can make the case -- whether they believe it or not, I don't know -- is that their deliberate undervaluation of their currency is basically not in the long-term interest of China because it has a terribly distorting impact on the Chinese economy as the Bank of China involved itself in this massive currency operation that Mr. Bergsten described. And it also has the very perverse effect of making relatively poor Chinese workers subsidize the consumption of relatively rich people in the developed world. It's a nutty situation.

  • 10:25:31

    REHMYeah, yeah...

  • 10:25:32

    NILESAnd if I were a Chinese citizen looking at this, I might say, what is our government up to?

  • 10:25:37

    REHMMmm. Fred Bergsten, what about the administration itself? You've accused the White House of failing to act on this issue.

  • 10:25:49

    BERGSTENI think they have failed to deliver effective results. They certainly have tried, but I don't think, for example, they've made the big effort to put together a multilateral coalition of the type we're all talking about here. They haven't gotten on a plane, gone to these capitols and tried to line up a coalition. There's going to be a big test in 10 days. The secretary of the Treasury has to file a report with the Congress twice a year on this currency issue -- under current law -- and indicate whether any foreign countries are manipulating their currencies. That report is due Oct. 15. The secretary of the Treasury has said he will submit the report.

  • 10:26:31

    BERGSTENIf there's no further progress on the currency over the next 10 days, if the Chinese don't let it move a lot, I think it would be very hard for him not to indicate that China is manipulating. At the hearings three weeks ago, 15 senators from both parties universally excoriated the secretary -- I was there, witnessed it, I testified right after him -- and said everybody in the world knows they're manipulating, but you won't acknowledge it. You won't admit it. Why not? Senator Schumer said three times, what are you afraid of? So the gauntlet has been put down. A lot of this does go to domestic politics here, relations between the Congress and the administration. But note, in the Congress, this one is totally bipartisan. The House vote attracted over 300 supporting yeas. One-hundred Republicans voted for it, so on this one, the domestic politics is pretty uniform.

  • 10:27:26

    REHMKen Lieberthal.

  • 10:27:27

    LIEBERTHALI just want to note that, as Fred said a while ago, the Chinese have been controlling the value of their currency for years. And for years, American Treasury secretaries, Republican and Democratic, have not been identifying them as a currency manipulator. And for years, members of Congress have been excoriating secretaries of the Treasury for not doing so. The reality is, if you identify China as a currency manipulator, the consequences of that are zero, which is to say all that the legislation requires then is that you engage in intensive discussions with the Chinese about their manipulation of their currency.

  • 10:28:03

    LIEBERTHALBut we've been doing that for years. Secretary Paulson did it. Secretary Geithner has done it. The president has done it directly. The Chinese, though, will react very strongly. They'll react very strongly because they'll consider it to be a major loss of face, that they have been identified as, in some fashion, a rogue player when we never identified the Japanese when the Japanese manipulated their currency and so forth. So they will take retaliatory action, I believe, simply as a matter of face. So the question is -- I understand the politics of this -- but in the real world, I don't think it's going to produce any results that we're very pleased with.

  • 10:28:40

    REHMTom, you've said the problem is really not the Chinese. You've said we are the principal problem. What do you mean?

  • 10:28:52

    NILESWe -- you mean the United States?

  • 10:28:55


  • 10:28:57

    NILESWell, you know, our trade deficit, which is one of the issues that underlies this bigger or separate issue with the Chinese currency, is largely a function of the performance of our own economy and the fact that our savings rate is, at some point, less than zero. It has now gone back up as a result of the economic crisis, but the balance of trade is very much related to the way in which our economy functions, the relationship between consumption, saving, investment. And because we save so little, we tend to have this very large merchandise trade deficit.

  • 10:29:39

    NILESAnd the Chinese know this, and they point it out to us from time to time that we need to rebalance our own economy. And there's no question that we definitely need to do that. Getting to the point that Mr. Lieberthal just made about the declaration or statement that Secretary Geithner has to make on the 15th of October, I certainly agree with him. Unfortunately, if Secretary Geithner fails to mention China -- and given all the publicity and all the concern that has been expressed -- it really won't pass the laugh test in Washington, and, you know, that's an issue that the administration has to consider.

  • 10:30:20


  • 10:30:20

    BERGSTENLet me address Ken Lieberthal's critical point. How would the Chinese react to being labeled a manipulator, or for that matter, passage of this bill? It is absolutely correct, as Ken says, that the Chinese vehemently argue that they will never act under foreign pressure, that it would be in fact counterproductive for the U.S. to put the spotlight on them. That would reduce the prospect that they would take corrective action with the exchange rate. And that, I think, is why all the secretaries of treasury, as Ken rightly said, have been reluctant and unwilling to label them. I guess I doubt the basic premise. I happen to have been in this business now for over 40 years, and I've had experience with a whole string of surplus countries with undervalued currencies.

  • 10:31:10

    BERGSTENAnd the truth is -- whether it was Germany, Japan, Korea or anybody else -- they were totally unwilling to act without foreign pressure. They were never willing to move on their own. They could never get off the comfortable position of subsidizing their trade and big trade surpluses. It took outside pressure -- that could be market pressure -- but the Chinese blocked that with comprehensive capital controls. So the only thing left is political pressure. I know what Ken rightly reports they say. He may be right in forecasting the outcome. But I do observe that when the congressional pressure built four or five years ago, that's when the Chinese did let their exchange rate go up 20 percent over a couple of years. When the congressional hearings loomed three weeks ago, the Chinese suddenly let the exchange rate go up at least a couple of percent. So they say one thing. I'm not sure they're going to behave that way -- Ken knows their psychology better than I do -- but I think it's an open question.

  • 10:32:11


  • 10:32:13

    LIEBERTHALWell, again, I think that they react to pressure. They do not react the way you want them to when you cause them to lose face. And I think that branding them a currency manipulator will not get the reaction that we would like to have. We'll have to see, but that would be my expectation. Let me make a broader point if I can also, which is that much of the argument behind this is that China's control of the value of its currency has a very significant effect on the U.S.-China bilateral trade balance. That's where a lot of the animism on the Hill comes from. I think that premise is not correct. I think China's control of the value of its currency has a lot of bad effects on global trade but only a marginal effect on the U.S.-China trade balance.

  • 10:32:59

    REHMKenneth Lieberthal. He is senior fellow at the Brookings Institution. And you're listening to "The Diane Rehm Show." We're going to open the phones now, 800-433-8850. First to Rockville, Md. Good morning, David. David, are you there?

  • 10:33:26

    DAVIDYes, I'm here.

  • 10:33:27

    REHMGo right ahead, sir.

  • 10:33:29

    DAVIDOkay. I live in Rockville. I came from China 15 years ago, and I'm doing well in this country. And this is a great country. I really like it. I love it. Okay? And also, I love this program very much because I often listen to this program, not only for learning knowledge, but also to improve my English. Now, I will leave a comment on global economy and the currency issue. I feel that, based on my experience in both countries, the people and leaders, the politicians in this country are either too nice or too naïve. Okay? I always hear a politician, including President Bush and President Obama, say that American people (word?) can compete and win in any field, on equal platform or equal footing.

  • 10:34:21

    DAVIDBut actually, that is not true. I know that in China -- compared to the Chinese people, Americans will never even win in many fields, especially the manufacturing industry. You know, stuff -- making stuff and fishing and gear, toys, and many, many other things. Americans will never win in terms of labor, right working conditions, worker protection system, like that. I feel that all the problems comes from the true cause, global economy. Money -- in my view, money is just like water. It flows from high to low. What the global economy lacks is that -- to deal is that -- like, in this country, rich people becomes richer. People...

  • 10:35:07

    REHMAll right, sir. Thanks for calling. Fred Bergsten.

  • 10:35:11

    BERGSTENWell, I basically want to go back to something Ken said in the last exchange when he suggested that a change in the currency would only have a marginal effect on the trade flows which is a question also -- the question that the caller raised. I think that's just wrong. We and others have done in-depth analysis of the issue. You can't be overly precise. But our judgment is that if the Chinese let their currency go up 20 percent, it would take their global trade surplus down by $300 billion or more. And it would take the U.S. global trade deficit down between $50 and $100 billion. That would create half a million good high-paying jobs in the United States, mainly in manufacturing. To the caller, I would say, price makes a huge difference, and the U.S. can certainly compete better if its price disadvantage of 20 to 40 percent against China is eliminated through the currency moves we're talking about.

  • 10:36:11


  • 10:36:11

    LIEBERTHALFred just referred to China's global deficit and our global deficit -- global surplus and then our global deficit, and I referred to the bilateral trade balance. If you look at what China exports to the United States, two-thirds of the value of those exports consists of things China imports from other countries, mostly in Asia, assembles in China and then export it to the United States. So if China increases its exchange rate by 20 percent -- this will be the U.S. -- two-thirds of that has already offset because their import of parts and components have become 20 percent cheaper to them to buy. So we're really down to about a 7 percent swing. Then if you look at the price from China of an item as compared with the retail price in the United States, the price out of China is only about 15 percent the retail price in the U.S. on balance. So you're talking about a relatively small change in a relatively small part of the price in the U.S. I just don't think it's going to make a very big difference.

  • 10:37:10

    BERGSTENBut, Diane, then the question to Ken is, so why did the Chinese fight it so fiercely if it's not going to make any difference?

  • 10:37:16

    LIEBERTHALAnd the answer is that they have politics, too. And they have a big export industry that's politically very powerful and doesn't want to see this change.

  • 10:37:24

    REHMKen Lieberthal of the Brookings Institution. Short break. We'll be right back.

  • 10:40:03

    REHMAnd welcome back. We'll go right to the phones to Little Rock, Ark. Good morning, Angelo.

  • 10:40:12

    ANGELOGood morning, Diane. I hope you're feeling better soon.

  • 10:40:15

    REHMI will be. I promise.

  • 10:40:18

    ANGELOGreat. The focus on the whole discussion has been on the United States and Chinese relations and the fact that China is devaluating its currency, which bad -- may be bad for China and bad for United States business, but what about the consumer? The United States -- these Chinese are subsidizing our cost of their items to the American consumer. If the American consumer -- if this crazy bill goes through -- the American will get it in the neck because these prices will go up -- first, because the Chinese goods will go up. And it's a small percentage of the total cost, of course, but, yeah, if those costs -- those -- the production cost goes up. The cost gets transferred down the line. Everybody goes up.

  • 10:41:05

    ANGELOThe second thing is that if the China won't buy these garbage American dollars, who will? So that means the United States gets devalued. All (word?) go up. The consumer gets it in the neck again. Now, it's nice to talk about American business, but the truth is, if those jobs that formed that they shipped out to Mexico and Guatemala, like one of your caller -- what are the -- like the guy that said before, United States won't get the jobs. The other companies will.

  • 10:41:35

    REHMAll right. Tom Niles.

  • 10:41:37

    NILESYes, ma'am.

  • 10:41:38


  • 10:41:38

    NILESWell, I would like to say that I tend to agree with Ken Lieberthal, that if this -- if the Chinese were to allow their currency to appreciate -- say, by 20 percent versus the dollar and other world currencies -- that the actual impact on U.S. imports would probably be fairly small. One thing we haven't talked about though is at -- in a positive sense, if that were to happen, U.S. exports to China would probably increase. I wouldn't say by, you know, an enormous amount, but we would -- U.S. exports that are not now competitive on the Chinese market because of the subsidization of the currency would be more competitive. So we would get some more business in China, and that would be beneficial to the United States.

  • 10:42:32

    NILESI agree with the caller from Arkansas who said that there would be some impact on consumer prices in the United States were the Chinese currency to appreciate. I'm not sure how great that would be, but certainly one of the factors that has held down inflation on a worldwide basis -- not just in the United States over, say, the last 10 years -- has been the availability of highly competitive low-cost goods from China and other countries which have to compete with China. So to the extent that the Chinese goods become more expensive, there could be some impact -- I wouldn't think it would be huge -- but an impact on inflation rates in the United States.

  • 10:43:17


  • 10:43:18

    BERGSTENThree quick points. Tom is right that at least our studies show that the biggest gains to the U.S. from China letting its currency go up would be on the export side. It would improve our competitiveness 20 to 40 percent across the entire range of export products. Those produce very high-paying good jobs in the United States. That's where the great bulk of the improvement would occur, and that would be a big objective of the exercise. Secondly, the caller is exactly right -- and Ken said it before. The Chinese currency undervaluation subsidizes the American and other foreign consumers. They keep their prices cheap, and that passes through Wal-Mart stores to the American purchaser. But like in all of the economics, there is no free lunch.

  • 10:44:05

    BERGSTENOur consumers get the goods more cheaply, but that also means the Chinese get the sales instead of American producers and American workers. So at some point, you have to say what's the fair balance? And when we calculate an equilibrium exchange rate -- which the Chinese are manipulating and staying away from -- it's an effort to balance the gains for economic growth and employment in the economy versus the impact on the consumer. But he's quite right. The consumer will lose because some of those cheaper goods won't be around.

  • 10:44:38

    BERGSTENFinal point, he talked about what happens if the Chinese no longer buy garbage dollars. Well, first of all, under any scenario, the Chinese are going to continue to run very large trade surpluses. They already hold $2.5 trillion. They have a huge interest in avoiding trashing the value of the dollar because they are the world's biggest holders of them. And even if they don't buy as many additional dollars in the future -- which is the objective because we want to get their trade surplus down -- other people in the global financial markets for dollars will do so. Again, might be a small impact, slightly higher interest rates, but right now, interest rates are virtually zero, no inflation in sight. This is actually the best time to get these currency changes.

  • 10:45:21


  • 10:45:23

    LIEBERTHALJust on the issue of whether we would get jobs if Chinese exports to the United States were reduced. China generally exports to the United States low-end products, and they are very unlikely to be products that then come back to U.S. manufacturing. They would rather go, as someone mentioned earlier, to Vietnam, Indonesia, Bangladesh, et cetera, rather than back to U.S. manufacturing. We do better at the high end, so we should be focusing on exports. I think it's not a -- we're not going to see a strong jobs effect simply from a reduction of Chinese sourcing of our imports from Asia.

  • 10:45:58

    REHMAll right. To Winter Springs, Fla. Good morning, Danny.

  • 10:46:04

    DANNYGood morning. I have an uneducated question, but I wanted to (word?) it with a couple of sentences to make sure I'm hearing what I think I'm hearing.

  • 10:46:12


  • 10:46:12

    DANNYWhat I'm hearing is that China is creating an unfair trade advantage by buying up to a billion dollars a day of U.S. currency. And my question, which again is uneducated, is why can't we play the same game and neutralize the economic impact of that by spending or marketing or trading up to a billion dollars a day of their currency?

  • 10:46:40

    REHMYou wrote about this, Fred.

  • 10:46:42

    BERGSTENDanny, that is not an uneducated question at all. You must have read my op-ed in the Financial Times yesterday where I proposed exactly that. Somebody said at the start of the program, I think Ambassador Niles, that this countervailing duty bill was not a very effective way to go after the problem, and that is correct. I agree with that. There are many more effective things we could do, and you just identified one. I call it countervailing currency intervention as opposed to countervailing import duties. We could do exactly what Danny said. We could offset their purchases of dollars by selling dollars, neutralize the exchange rate effect and, I think, probably deter the whole practice. There is a technical problem in the Chinese case. Their currency is inconvertible. You can't just go into the market and buy it...

  • 10:47:30

    REHMBuy, yeah...

  • 10:47:30 you can Japanese Yen, Euros. Nevertheless, we could find proxies. The message would be unmistakable. It would unleash a lot of private speculative money into the RMB, and I think that would be much more effective. There is a provision of that type in the Senate bill that Schumer and 17 other senators will consider when the Senate turns to this...

  • 10:47:51

    REHMNow, that differs from the House bill.

  • 10:47:54

    BERGSTENIt's -- that's an additional -- it's got the same as the House bill, but it's got this additional element that they call remedial intervention.

  • 10:48:01

    REHMWhat do you think of that, Ken?

  • 10:48:04

    LIEBERTHALWell, I think that the U.S. generally argues against currency intervention by government. So if we were to pursue this, one of the downside repercussions would be that we're setting an example of the kind of behavior that we do not want others to follow. I think right now, around the world, one of the really big global threats -- and I think China is very much on the wrong side of this -- one of the really big global threats is competitive devaluation through government intervention.

  • 10:48:32


  • 10:48:33

    LIEBERTHALAnd that is a race to the bottom. No one wins that race. And if we join that race, I don't think we're doing anyone a lot of good in the process.

  • 10:48:41

    REHMTom, may I...

  • 10:48:41

    BERGSTENBut Ken, we're not setting the precedent. The Chinese have been doing it hugely for five years. We're trying to get them to cease and desist.

  • 10:48:50

    REHMTom, what do you think of that?

  • 10:48:52

    NILESI think I agree entirely with Ken Lieberthal. You know, to jump into this pit would be a huge mistake, I think, for the United States. And, you know, the other countries are beginning to follow China's bad example. I mentioned a few of them -- Brazil, Japan, the Koreans -- and if the United States suddenly were to adopt the same business, then we'd be back in the 1930s when we had competitive devaluations. And at the end, everybody lost.

  • 10:49:22

    REHMAll right. To...

  • 10:49:24

    NILESSo I think that that's a very bad idea. Again, I get back to the point I made before. We don't want to make this a U.S.-China great power ego issue. We want to try to build pressure on the Chinese, but from the world, because it is a world issue. It's not just a U.S.-China issue.

  • 10:49:43

    REHMAll right. Next up is Pat in Lakewood, Ohio. Good morning.

  • 10:49:50

    PATGood morning. Thank you. I guess I was curious -- so much that goes on in the world, as I see it, seems to be based on, you know, whoever the biggest player is on the field. And if I'm looking at this from the Chinese standpoint, they have gotten to be, you know, the 800-pound gorilla. And in some cases, you know, they can do what they want just as we do in some foreign diplomatic items.

  • 10:50:20

    PATWe -- I -- what I keep hearing is some of these people seem to be talking about everything as though everything revolves around the United States. And I'm not sure they're -- and I understand maybe -- that maybe, you know, the player they're representing. However, to me, if I'm looking at what's in the best interest of the country involved -- in this case China -- I can see exactly why they do what they want. And, you know, when -- as somebody, you know, starts rattling the sabers and everything saying, well, you know, this is not in their best interest, and this is not good for us. And I almost have to laugh sometimes. And so...

  • 10:51:06

    LIEBERTHALYou know, the Chinese do regard us as the 800-pound gorilla. Our per capita GDP is 13 times China's per capita GDP, but, having said that, the gap between us and the Chinese has narrowed over the last several years. They've done better in managing through the financial and economic crises than we have. I think one of the problems in our relationship now is that there are many in China, especially at a popular level, who think that gap has narrowed very dramatically and that the momentum is on China's side. So it's now therefore time for China to do exactly what Pat just suggested, to do things their way and have the U.S. adjust.

  • 10:51:49

    LIEBERTHALBut the reality is, the gap is narrowed, but not dramatically. And so when China tries to do things their way, we don't cooperate and frictions rise very rapidly, and the Chinese find there's very little they can do about that. So we're in a period of transition. The reality is, for the Chinese economy, the U.S. is still by far the biggest player in the world. They need to take us very seriously, but we have to understand this is a huge, important rising country with complicated politics of its own. And the reality is, both of us have to do a good job of understanding the other and reaching some compromises here, or we're both going to be very big losers 'cause we're highly interdependent.

  • 10:52:32

    REHMFred, how likely is it that this bill is going -- already passed by the House -- is going to be addressed by the Senate?

  • 10:52:44

    BERGSTENIt's very hard to say. The relevant committees in the Senate have not prepared for legislative action in the lame-duck session after the election. On the other hand, there is a lot of political pressure to move on this issue. And Senator Schumer, for example, has said on the floor, I guarantee this bill will come to the floor. It will pass by an overwhelming majority and will even be veto-proof. We just don't know, and it may depend on how the election comes out.

  • 10:53:13

    REHMFred Bergsten. And you're listening to "The Diane Rehm Show." Now, to Princeton, N.J. Good morning, Linda.

  • 10:53:23

    LINDAGood morning, Diane. What a nightmare we're talking about. I just want to know, is it safe for me to go off to Scotland and live in a little shack somewhere? That's my dream. My question involves the borrowing that the United States government has done to fund the wars in Iraq and Afghanistan. How much money was borrowed from China, over what period of time?

  • 10:53:48

    REHMDo we know?

  • 10:53:48

    LINDAAnd how much borrowed from Japan?

  • 10:53:51

    REHMDo we know, Tom?

  • 10:53:53

    BERGSTENMoney is fungible, so we didn't borrow directly from China or Japan to fund the wars. But the fact that we've been running huge budget deficits higher because of those wars has clearly increased our reliance on foreign countries to finance the U.S. economy.

  • 10:54:13

    REHMWhy don't we know how much came from China, how much came from Japan?

  • 10:54:18

    BERGSTENWell, we know roughly how -- what the level of their dollar holdings are -- in the case of China, probably between $1.5 trillion to $3 trillion that they hold in total U.S. assets. The financial markets are fungible, so whether they buy treasury or something else is not that critical. But they have been funding our consumption, our economic activity to a very large extent. Something like half of all our government borrowing in recent years has come from foreigners, of which China is number one, Japan is number two. So we've been relying on them. And again, as somebody said before, that's our fault. We've let ourselves get into huge dependency.

  • 10:54:56


  • 10:54:57

    LIEBERTHALFred is right. But let me texture that a little bit. If you look at U.S. treasuries, China holds less than 10 percent of U.S. treasuries. Germany has held less than 7 percent of U.S. treasuries. The same is true of other major debt -- Fannie Mae, Freddie Mac, what's called agency debt. So the reality is the Chinese have gotten themselves in a bad position. They have taken a very high percentage of their dollar holdings and put them into U.S. sovereign and agency debt -- basically loaned them to the United States to use -- but they hold a relatively small percentage of our total debt because our debt mark is just so enormous and so liquid and so wide-ranging.

  • 10:55:33

    LIEBERTHALSo it's almost as if -- this is inexact but maybe will help clarify things -- it's almost as if you as an individual took a large percentage of your wealth and bought the stock of General Electric. And after that, do you have enough stock in General Electric to tell General Electric what to do? No, you don't. But do you have a huge interest in General Electric's doing well? You certainly do. And China is roughly in that kind of position with the U.S. It isn't that China can tell us what to do. We obviously want the Chinese to keep buying. We have an interest in things going well. But if anyone has leverage here on balance in the sense that it's more consequential for us -- for them, what we do rather then, whether they keep buying our treasuries at the same level, I think the leverage is more on our side on this one.

  • 10:56:22

    REHMI think this discussion, which we've had many times on this program, is likely to continue. Thank you all so much, Fred Bergsten, Ken Lieberthal, former Ambassador Thomas Niles. Thanks for listening, all. I'm Diane Rehm.

  • 10:56:42

    ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Susan Nabors, Denise Couture and Monique Nazareth. The engineer is Tobey Schreiner. Dorie Anisman answers the phones. Visit for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information. Our email address is, and we're on Facebook and Twitter. This program comes to you from American University in Washington. This is NPR.

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