Both the Financial Times and New York Times (hence the post title) have recent articles which refer to the Chinese currency issue. From the FT:
True, Washington and Beijing are trading heated accusations over whether China’s continued policy of holding down the renminbi is responsible for global imbalances. But for the moment, as Gary Horlick, Washington lawyer, says: “There seems to be an implicit deal between the US and China not to start a [legal] fight on currencies and to let the lawyers litigate everything else.”
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And so to currencies. As Sunday’s intervention from Wen Jiabao, the Chinese premier, underlined, this is undoubtedly the most serious flashpoint in global trade. But it is worth remembering just how hard it is for the US to do anything about it.
One much discussed option is naming China a currency manipulator in the twice-yearly currency report, the next of which is due by mid-April. But even this would do nothing more than compel the US Treasury secretary to negotiate with the Chinese, which he is doing anyway. It resembles the old Robin Williams stand-up routine about an unarmed British policeman trying to apprehend a fleeing suspect: “Stop! Or . . . I’ll shout stop again!”
Taking a legal case over exchange rate misalignments to the WTO would probably fail, and take years in any case. The only real route left is to unilaterally slap tariffs on Chinese imports to compensate for alleged currency undervaluation. That would be a nuclear option that really could spark the destruction of the postwar world trading system, and it doesn’t look like the US is quite desperate enough for that yet. A second dip in the US recession and a further sharp unemployment rise might do it, but it is not imminent.
And from the NYT:
Seeking to maintain its export dominance, China is engaged in a two-pronged effort: fighting protectionism among its trade partners and holding down the value of its currency.
China vigorously defends its economic policies. On Sunday, Premier Wen Jiabao criticized international pressure on China to let the currency appreciate, calling it “finger pointing.” He said that the renminbi, China’s currency, would be kept “basically stable.”
To maximize its advantage, Beijing is exploiting a fundamental difference between two major international bodies: the World Trade Organization, which wields strict, enforceable penalties for countries that impede trade, and the International Monetary Fund, which acts as a kind of watchdog for global economic policy but has no power over countries like China that do not borrow money from it.
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An undervalued currency keeps a country’s exports inexpensive in foreign markets while making imports expensive. That makes a trade surplus more likely, reducing unemployment for that country while increasing unemployment in its trading partners.
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If China is found to be manipulating its currency, it could be a political and economic challenge for the Obama administration. President Obama called on Thursday for China to introduce “a more market-oriented exchange rate.” China’s defiant response keeps the administration in a difficult position.
Over at the Conglomerate, David Zaring has the following take on the NYT piece, in particular the part about the lack of international currency rules:
•The implication is that we should have some sort of global currrency discipline, as the EU had before it moved to the Euro, I suppose. Such a discipline could be had by the lamented-by-few gold standard, I suppose. But ... really? Gold?
•More to the point, I, like the Times, believe in international law and institutions - maybe we should have an international currency union! But story that suggests that what China has going for it is membership in the iron-disciplined WTO and rogue-state status as a currency provider suggests that international law has much, much more power than it probably really does. If the US and EU wanted to invoke safeguards and slap massive tariffs on Chinese goods, they could do it. If they want to trade Taiwan arms sales for massive currency deflation, they could possibly do that as well. Even without a WTO for the world's currencies.
Let me just add another option. My suggestion would be for something different than a currency union or currency band or gold standard. As I have said before (somewhere -- there are too many posts at this point to seach for it!), I think international rules limiting the use of currency manipulation to favor domestic over foreign products would be a good thing. In essence, it would be a limited commitment to let the market determine exchange rates. So while the other proposals would be for fixed currencies (to some extent), mine would be for a commitment to floating currencies.
In addition, I'm not completely convinced that a WTO claim "would probably fail," as one of the articles notes. Which reminds me that I have a follow-up post on GATT Article XV that I've been meaning to get to for some time. I'm going to aim for next week.
As a final China currency news items, Paul Krugman (of the NY times -- coincidence?) argues:
Some still argue that we must reason gently with China, not confront it. But we’ve been reasoning with China for years, as its surplus ballooned, and gotten nowhere: on Sunday Wen Jiabao, the Chinese prime minister, declared — absurdly — that his nation’s currency is not undervalued. (The Peterson Institute for International Economics estimates that the renminbi is undervalued by between 20 and 40 percent.) And Mr. Wen accused other nations of doing what China actually does, seeking to weaken their currencies “just for the purposes of increasing their own exports.”
But if sweet reason won’t work, what’s the alternative? In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.
To which Dan Drezner replies:
Whoa there, big fella!! That's a nice but very selective reading of international economic history you have there.
It's certainly true that the dollar was overvalued back in 1971. What Krugman forgets to mention -- and see if this sounds familiar - is that the Johnson and Nixon administrations contributed to this problem via a guns-and-butter fiscal policy. They pursued the Vietnam War, approved massive increases in social spending, and refused to raise taxes to pay for it. This macroeconomic policy created inflationary expectations and a "dollar glut." Foreign exchange markets to expect the dollar to depreciate over time. Other countries intervened to maintain the dollar's value -- not because they wanted to, but because they were complying with the Bretton Woods system of fixed exchange rates. Nixon only went off the dollar after the British Treasury came to the U.S. and wanted to convert all their dollar holdings into gold.
In other words, the United States was the rogue economic actor in 1971 -- not Japan or Germany.
It's only on rare occasions that I'm sure of things in relation to trade policy, but I'm fairly sure that the U.S. will not impose a 25 percent tariff on Chinese imports. Putting the obvious WTO violation aside, I think it is highly unlikely such an action would cause China to let its currency appreciate. If anything, China would be more relectant to change its current policy if the U.S. did this.
