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Battle line over the renminbi

by Kevin Rafferty

Special To The Japan Times

Talk of a new “trade war” over the allegedly undervalued Chinese currency is yet again echoing through the corridors of power in Washington. The U.S. Senate seems determined to pass a bill penalizing China for manipulating the renminbi to keep its value artificially low. Beijing has responded by “regretting” the Senate’s action and saying that it would violate World Trade Organization rules.

Sadly, the measure demonstrates the dysfunctionality, especially of the American political and economic system, but also of what I hesitate to call the global system, because there is hardly any global economic governance.

American economists and politicians have huffed and puffed against Beijing for years claiming that it practices unfair trade by keeping the currency undervalued to boost Chinese exports and jobs and, by implication, to damage the U.S. economy.

Democratic Sen. Chuck Schumer of New York claims that China’s currency policies have cost more than 2.8 million jobs since 2001. The Senate’s proposed measures would empower American businesses and trade unions to demand that the Commerce Department investigate cases of alleged currency manipulation and seek retaliatory tariffs on imported goods.

The bill would also tighten rules on the U.S. Treasury in deciding whether — as in the case of China so far — to label a country a currency manipulator or not and thereby punishable (subject to countervailing duties). Schumer, a key author of the bill, predicted an “overwhelming vote” of approval and said, “The time for asking China nicely is over.”

Clyde Prestowitz, founder of the Economic Strategy Institute and a trade adviser to President Ronald Reagan, admitted that legislation is a blunt instrument but hoped the threat of congressional action would “spur the White House and other leaders to use their scalpels before Congress wields its meat ax.”

He quoted Fred Bergsten, director of the Peterson Institute for International Economics and a longtime critic of China, as judging that the renminbi is still undervalued against the dollar by 20 to 30 percent, and that the Chinese currency is more undervalued on a trade-weighted basis today than last year or five years ago, despite a 25 percent appreciation against the U.S. dollar since mid-2005.

Bergsten adds that Beijing buys $1 billion a day in forex markets to keep the renminbi undervalued. Xinhua’s (English service) article titled “Don’t politicize Chinese currency” argued that the Senate’s moves “are more like a publicity attempt to distract voters’ attention from the real problems facing the U.S. economy.”

The Senate’s behavior seems stupid because the bill has little chance of passing into law. Surprisingly, the Republican-dominated House of Representatives has shown little inclination to take up the Senate measure. Even if it did and also passed a bill attacking China, White House officials have made it plain that President Barack Obama is against it, although spokesman Jay Carney, when pressed, said, “We are reviewing the bill.”

Republican contenders for the presidency next year are split on whether to support the proposed legislation. A spokesman for Texas Gov. Rick Perry said, “This is a free trade issue and Governor Perry does not support this bill.” Mitt Romney, Perry’s closest rival, has said he would make China’s currency an issue from his first day in office and termed China an “economic threat.” Jon Huntsman, former U.S. ambassador to China, who is lagging in the race, said he “would sign (the bill) simply … to keep pressure on China.”

Whether it is productive to pressure China is moot. Supporters of pressure contend that only when pressed hard did Beijing resume allowing the renminbi to appreciate. But Bergsten’s claim that there is still such a large undervaluation, along with a growing U.S. deficit in trade with China — up by 12 percent in the first half of this year — suggests that pressure and threats have had limited success.

In a carefully argued presentation for the Brookings Institution, Arthur Kroeber, who is based at Brookings Tsinghua center, acknowledged that pressure from the U.S., the International Monetary Fund and World Bank, along with Chinese domestic concerns, had led China to allow appreciation from 2005. But he suggested that there was a gulf in the ways of thinking of the currency issue between the West and Beijing. In the Western view, the exchange rate is merely a price, and therefore consistent intervention by China to set the exchange rate below the market rate is a distortion that prevents markets from functioning properly. It also distorts China’s own economy by encouraging investment in exporting industry and discouraging investment in China’s consumer market.

Kroeber notes that China’s perspective is different: “Chinese officials see the exchange rate — and prices and market mechanisms in general — as tools in a broader development strategy. The goal of this development strategy is not to create a market economy, but to make China a rich and powerful country. Chinese leaders observe that all countries that have raised themselves from poverty to wealth in the industrial era, without exception, have done so through export-led growth.”

The bigger problem is that the renewed spat between the U.S. and China exposes the dysfunctional global system. There is no forum to discuss and explore the issues rationally — less still to reach agreed measures to alleviate problems before they come to an ugly head as Western debts and deficits and flaws in the euro system already have and as the currency issue threatens to.

The IMF is too weak. The World Trade Organization, which former IMF chief economist Simon Johnson has suggested as a forum for the currency dispute, is slow and cumbersome.

In spite of protests about Western bullying, Beijing has shown no sign of capitulating. In reality, greater damage is being done by the undervalued renminbi to the economies of other smaller, and newly emerging exporting economies like Bangladesh, Brazil and Vietnam, than to the U.S., but they have been loathe to criticize China. The greatest real damage is being done to China itself with its overinvestment and suppression of consumption, slumping at an almost unprecedentedly low 35 percent of GDP. Ironically, premier Wen Jiabao pleaded last month with the EU to declare China a market economy while expressing distrust of the market.

Meanwhile, with unemployment at 9.1 percent (14 million to 30 million, depending on how it’s measured), the dysfunctional Congress has failed to find the time to discuss Obama’s supposedly urgent plan to create more jobs. Obama’s leadership is rapidly becoming the oxymoron of the impending election campaign.

Kevin Rafferty is editor in chief of PlainWords Media.