Speaking of US-China competitiveness, Paul Krugman has been on a tear over the past week arguing that the US has to put some muscle behind its demands for China to stop undervaluing the yuan. The other day Krugman addressed China’s allegations that imposing countervailing tariffs to retaliate for Chinese currency manipulation would violate WTO rules. And indeed it isn’t really clear whether WTO and IMF rules consider currency manipulation to be a trade subsidy, so it’s not clear whether the US has a case on those grounds.
But here’s my question: if it’s not a violation of WTO rules to manipulate your own currency, why doesn’t the US simply do exactly the same thing China is doing? Why don’t we purchase a countervailing quantity of Chinese government debt to compensate for the US government debt China buys in order to keep the yuan low? Is it because the US government, unlike the Chinese government, lacks the spare cash to buy up foreign debt? If so, couldn’t the Fed do this as an open-market operation? Or is it because the Chinese State Bank controls sales of government bonds and would stop us from buying up Chinese debt via administrative measures? Or does Chinese government debt simply not trade openly? Or what?
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