Is Friedman Right?

In a recent article by the Economist, the currency manipulation of China was brought up; a recent topic of discussion in IPE and the presidential debate. The candidates have been debating who would be tougher on China (although Romney has flipped-flopped yet again), by insisting that after being elected they would place restrictions on Chinese products. Krugman refutes this by claiming in the past two years, China has undergone inflation and their currency has appreciated relative to the dollar. Because of these statistics, the famous claim that China is undervaluing its currency to benefit its export market and harm the export markets of other industrial countries is faulty.

The article goes a step further and counters the claim that we even needed to be tougher than we were on China during the Obama administration. He claims that being even tougher would have been counterproductive and harmed us more. This could have perhaps been true, as China could have reacted by stopping the purchase of US bonds, thus raising the price of our borrowing and the interest rate we would have to pay lenders. This raises a peculiar situation, as we cannot upset China too much or else we will lose an incredibly large lender, but to what extent should we stand for China’s currency manipulation?

In another article by the Economist, an even more alarming view is presented by stating that “the dollar’s influence has declined in 38 cases” from 2005-2008, and these were pre-crisis years. They claim that East Asia is now on the yuan standard, their currencies adjusting similarly to the yuan, in the current economy. Other areas of the world still react more to the dollar, but the Economist claims that the Chinese currency will continue to increase “as its economy and trading activity grow in size,” and the Chinese currency will surpass the dollar by 2035.

This statement is pretty striking to me, and makes me question whether Friedman’s worries about Asia and other developing areas surpassing the US may be true on a financial level as well as a production level. Regardless of whether this statistic is accurate, East Asia is gaining influence quickly both in finance, manufacturing, service industry, and intellectual property. We may not need to panic just yet, but we must come to terms with the fact that we are not the unchallenged giant we like to think we are.