Dollar Diplomacy | PBS NewsHour

C. FRED BERGSTEN:

Yeah, the problem is that the U.S. is running an overall trade deficit of about $600 billion. That is a big drag on our economy because it means a lot of the demand for the products and services we generate at home are met by foreign suppliers, Chinese, Japanese and others creating jobs there instead of here at home.

Likewise, there's a risk with the trade deficit of that magnitude that the exchange rate of the dollar may come crashing down one of these days like it has three times in the last 30 years. That raises big financial instabilities and risks.

The better course, therefore, is to get a modest orderly steady correction of the exchange rate of the dollar. The dollar has, in fact, come down about 30 percent against the Euro and therefore the European countries over the last couple of years, but it hasn't budged at all against China.

China is the biggest single share of our huge trade deficit, but China pegs its currency to the dollar. So when the dollar comes down against the Europeans and others, the Chinese currency comes down with it, actually increasing their price competitiveness, strengthening their trade position, making them an even tougher competitor.

Our calculation is that the Chinese currency undervalued by about 20 to 25 percent. If they would raise it by that amount, thereby permitting other Asian currencies also to go up at least part way, we would probably get something like a $50 billion reduction in our trade deficit.

That would add something like 500,000 manufacturing jobs to the U.S. economy. It wouldn't solve our unemployment problem, it wouldn't reverse the decline in manufacturing employment but it would be a substantial benefit to the economy.

So on all counts, domestic job creation, reducing the risk of big trade deficit and reducing the risk of protectionist trade pressures against China there's a strong case for having that kind of currency change, and I believe it's in China's interest to do it as well.

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