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The Yen, Yuan and the Big Three Meeting with President Bush

Prof. Peter Morici - 11/19/2006

The President is meeting with leaders of the Big Three domestic automobile companies. Auto leaders say they want don't want special treatment but rather solutions that generally help U.S. businesses.

High on the list is the undervalued Japanese yen, and it provides a perfect example of an issue where the auto industry speaks out of two sides of its mouth and behaves unrealistically.

The dollar is extremely undervalued against the Chinese yuan, Japanese yen and several other Asian currencies, and this problem affects all domestic manufacturers competing with trans-Pacific imports.

Consistently, GM, Ford and Chrysler lobby for relief on the yen but are noticeably reticent on the Chinese yuan, because they are locating factories in China and enjoy the benefits of Chinese protectionism.

The Big Three can’t have it two ways, a stronger yen and a weaker yuan. Japan can not appreciably revalue its currency, nor can other Asian governments revalue their currencies, until China stops intervening in currency markets.

Each month, China buys with yuan nearly $20 billion in U.S. dollars and hard currencies. The yuan it prints for this purpose flow into the hands of consumers in the United States and Europe, and create a 25 percent subsidy on Chinese exports. Unless and until China stops this egregious violation of free trade principles, Japan and other Asian economies undervalue their currencies too.

A resolution to the Big Three’s problems with the Japanese yen is not possible until the Big Three embrace realism and recognize the damage imposed by Chinese currency manipulation.