Don't dismiss Mitt Romney's manipulator pledge too lightly
Election promises often come to nothing but a slowing of investment and a possible current-account rebound may yet see those vows kept
In a US presidential campaign characterised by negative tactics, there have been few hard and fast promises from either candidate for voters to latch on to.
The one that has stood out is Mitt Romney's pledge to declare China a currency manipulator on his first day in the White House.
Most observers have dismissed Romney's stance as normal electoral China-bashing. Candidates typically talk tough on China during the campaign, accusing Beijing of holding down the value of the yuan in order to steal an unfair trade advantage. Once in office, however, they soon tone down their rhetoric.
In 2008, Barack Obama took a similar line, threatening sanctions against imports from China. "Here's the bottom line," he said during the campaign. "You guys keep on manipulating your currency, we are going to start shutting off access to some of our markets."
Once elected, however, he moderated his language and never made good his threats.
So it's no surprise observers are attaching little weight to Romney's election pledge to label China a currency manipulator.
Part of the reason is the recent strength of the yuan. In the past three months, the Chinese authorities have allowed the yuan to appreciate by more than 2 per cent against the US dollar, with the Chinese currency climbing to its strongest level since 1994.
What's more, there is little evidence that the People's Bank of China has been leaning against the market by intervening to slow the currency's rise.
If the PBOC had been manipulating the exchange rate, it would have been accumulating foreign currencies. But as the first chart shows, in recent months the central bank has been a net seller of foreign exchange, rather than a net buyer. Nor is there much evidence that the yuan is severely undervalued, giving China an unfair trade advantage. In the first nine months of 2007, China recorded a trade surplus with the rest of the world of US$186 billion. Over the first nine months of this year, its surplus had contracted to US$148 billion, a fall of 20 per cent.
As a result, few people are taking Romney's currency manipulator pledge seriously. But, warns Mark Williams at independent research house Capital Economics, it would be a mistake to dismiss the Republican candidate's threat too lightly.
Williams notes that although China's overall trade surplus has fallen lately, as the second chart shows, its bilateral surplus with the US has continued to mount - and it's the bilateral surplus that US politicians are concerned about.
What's more, Williams points out that the decline in China's current-account surplus - the broadest measure of the country's foreign trade position - from 10 per cent of gross domestic product in 2007 to less than 3 per cent last year was largely the result of a domestic investment boom that sucked in imports.
With that investment binge now winding down, China's current-account surplus is likely to rebound once more, adding to trade friction.
So although labelling China a currency manipulator would have little initial effect, it could have severe repercussions later on in a Romney presidency. If heightened tensions prompt Congress to resurrect one of its shelved anti-currency manipulation bills, the administration could even end up imposing punitive tariffs on imported Chinese goods.
As Williams notes, there are precedents. In 1971, president Nixon slapped a 10 per cent tax surcharge on all imports of manufactured goods. And in 1985, US threats of trade retaliation were instrumental in persuading Japan to sign the Plaza Accord, which saw the yen double in value against the US dollar in just two years.
China's leaders believe that signing the Plaza Accord wrecked Japan's economy; a mistake they have no intention of repeating. If forced to it, they would prefer outright trade war.
Happily, the chances look remote. Although recent opinion polls indicate the two presidential candidates are running neck and neck, the prediction market Intrade, which has a solid record of correctly calling election results, currently puts the probability of a Romney victory next week at just 31 per cent.
If it's right, he'll never get the chance to keep his promise.