Peter Morici is a professor at the Robert H. Smith School of Business at the University of Maryland.
Then as now, many experts and pundits argued that governments should fix currency exchange rates, which are nothing more than prices, the way governments fix the price of sugar, curiously, to serve the greater good.
We hear about China's weak financial system and the need for exchange-rate stability in developing countries. However, we should always be suspicious when tenured professors, who rarely endure the bracing winds of market competition, and politicians, who require financial support from those invested in the status quo, argue that prices should be fixed by governments and fixed forever.
A litany of ills
The fact is, China's financial system would be no more rickety or vulnerable than it is now if the yuan were repegged to a value consistent with underlying supply and demand.
Currently, thanks to China's yuan peg, the demand for yuan greatly exceeds the supply in foreign exchange markets. To maintain 8.28 yuan per dollar, Chinese monetary authorities purchase dollars in those markets rather than let the yuan rise to about 5 per dollar.
In turn, Chinese monetary authorities purchase U.S. Treasury bonds and other securities to earn interest on their hoard, and that drives down U.S. mortgage rates.
In China, that policy has created overinvestment in export industries, excessive urban development and great stress in international oil markets. In the United States, underpriced Chinese products have wreaked havoc on manufacturing and contributed greatly to the housing bubble.
Lest they lose U.S. markets to China, other Asian governments must follow China's lead, exacerbating all those problems.
Automakers and suppliers from the first tier down to steel, textile and plastics manufacturers are victims of that mercantilism.
Asian exporters, such as Hyundai, Kia and Chinese auto parts makers, benefit from export subsidies through that arcane currency trading. Asian manufacturing costs, made artificially low by rigged currencies, are pressuring parts suppliers to shutter U.S. plants and move their operations across the Pacific.
With fairly valued currencies, Asian carmakers and parts makers would not look like supermen, and the outsourcing impulse would not be an imperative. Chinese hypergrowth would not be consuming so much petroleum and driving up gasoline prices and shrinking markets for the Big 3's truck-based SUVs and other trucks and the parts used to make them.
Free trade in all things
In the United States, subsidized Asian competition is stretching support for open trade to the breaking point among voters and in Congress. If it continues, U.S. support for the World Trade Organization will disappear, and a breakdown in that system would overwhelm the gains Asian countries obtain from undervaluing their currencies.
To solve the problem, the yuan should be revalued in steps to 7, 6 or 5 to the dollar, and Chinese authorities should stop buying dollars to maintain the peg. In addition, China gradually could widen the trading range to achieve a market-determined value for the yuan in three or four years.
One of the great accomplishments of the defenders of a pegged yuan - including many who have advised our president - has been to label as protectionists the critics who advocate a market-determined yuan.
That's nonsense. We are arguing that free trade in goods, including automobiles and parts, be accompanied by free trade in currency, so that U.S. manufacturers and their workers have the same opportunity for prosperity as Chinese entrepreneurs and workers.
Remember, the exchange rate is nothing but a price. When a government fixes prices, sooner or later someone gets hurt.
Why should America's automakers and their suppliers be the victims?