Reality gap gets wider
In the next day or so the US Senate seems determined to pass a bill attempting to penalise China for manipulating the yuan to keep its value artificially low. Sadly, the measure demonstrates the dysfunctionality, especially of the American political and economic system, 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 practises unfair trade by keeping the currency undervalued to boost Chinese exports and jobs, and thus by implication to damage the US economy.
This time the Senate is set for action, with measures that would empower American firms 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 US Treasury in deciding whether to label a country a currency manipulator and thereby punishable with countervailing duties.
The measure is exciting strong passions on all sides. Senator Chuck Schumer, a Democrat from New York and a key author of the bill, predicted an 'overwhelming vote' of approval and said: 'The time for asking China nicely is over.'
Former trade official Clyde Prestowitz, founder of the Economic Strategy Institute and trade adviser to president Ronald Reagan, admitted legislation was 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 axe'.
He quoted Fred Bergsten, director of the Peterson Institute for International Economics and a long-time critic of China, as judging that the yuan is still undervalued against the dollar by 20 to 30 per cent, and that the Chinese currency is more undervalued on a trade-weighted basis today than last year or five years ago in spite of a 25 per cent appreciation against the US dollar since mid-2005. Bergsten adds that Beijing is buying US$1 billion a day in forex markets to keep the yuan undervalued.
On the other side, Xinhua in its English service on Sunday published an article headlined, 'Don't politicise Chinese currency', and claimed the Senate's moves 'are more like a publicity attempt to attract voters and distract attention from the real problems facing the US economy'.
The Senate behaviour is dysfunctional to the point of being 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. White House officials have made it plain that President Barack Obama is against.
Republican contenders for the presidency next year are split on whether to support the proposed legislation. A spokesman for leading contender Rick Perry, governor of Texas, said: 'This is a free-trade issue and governor Perry does not support this bill.' But 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'.
Supporters of pressure contend that only when pressed hard did Beijing resume allowing the yuan to appreciate. But Bergsten's claim that there is still such a large undervaluation, along with a growing US deficit in trade with China - the gap grew by 12 per cent in the first half of this year - suggests that pressure and threats have had limited success.
In a presentation for the Brookings Institution published last week Arthur Kroeber, who is based at Brookings-Tsinghua Centre, acknowledged that pressure from the US, the International Monetary Fund and World Bank, along with Chinese domestic concerns, had led China to allow yuan appreciation from 2005.
But he suggested that there was a gulf in 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.
But, Kroeber notes, 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 US and China over exchange rates 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 Organisation is slow and cumbersome.
In reality, greater damage is being done by the undervalued yuan to the economies of other newly emerging exporting economies like Bangladesh, Brazil and Vietnam, than to the US. But the greatest damage is being done to China itself with its overinvestment and suppression of consumption, slumping at an almost unprecedentedly low 35 per cent of GDP. It is ironic that Premier Wen Jiabao was pleading last month with the EU to declare China a market economy while distrusting the market.
Meanwhile, with US unemployment still at 9.1 per cent, Congress has failed to find the time or energy to discuss the supposedly urgent plan to create more jobs. Obama's leadership is rapidly becoming the oxymoron of the election campaign.
$273b
America's trade deficit, in US dollars, with China last year
- The gap cost 2.8m jobs since 2001, says the Economic Policy Institute
