The Right Way to Challenge China on Currency Posted by Jacob Stokes

Greg Sargent explains that another bill designed to punish China for currency manipulation is coming down the pike:

The battle over the American Jobs Act has sucked up all the oxygen, but there’s another jobs fight you really should be keeping an eye on: The battle over the measure to punish China for currency ma­nipu­la­tion. 

It’s a really interesting story, and it’s going to heat up in a big way next week. A lot is riding on the outcome — according to one estimate it could create over 1 million jobs. House Dem leaders like Nancy Pelosi are pushing hard for it, and passage it could dshore up vulnerable Democratic Senators in swing states that have hemorraged manufacturing jobs to China.

A similar bill was passed by the House around this time last year. What I wrote about it then largely still applies now (except the unlikely to pass part): 

First, while the bill is unlikely to pass, it will give some ammunition to the Obama administration when it goes to China and tries to play good cop (administration), bad cop (Congress) with the Chinese, giving credibility to threats about actions America is prepared to take on the issue. This is important because a central characteristic of the Chinese regime is that they’re much more concerned about force and coercion than they are about being the sparkle in the eye of the international community. 

Secondly, as America begins to push back on the issue, the Chinese government can use that pressure as a convenient excuse to push back against their own influential export lobby, which is the biggest proponent of keeping the value of the yuan low. Chinese leaders know they need to expand the domestic market and help the Chinese consumer buy more; increasing the value of the yuan will do that. What’s more, the amount of currency intervention needed to keep the yuan low creates all sorts of negative sides effects, an overheating economy being only one of them, that the Chinese government would like to get rid of.

Finally, it’s important to address concerns about possible effects of this legislation, especially the concern that the move will spark a trade war. But as the Wall Street Journal’s China Real Time blog points out, the legislation would likely get struck down by the WTO before it could create a trade spat. And even it didn’t, China and the U.S. have too much at stake, their economies are too interconnected, for it to make sense for them to retaliate by engaging in an all-out trade war. The WSJ blogs quotes Li-Gang Liu, China economist for Australia & New Zealand Banking Group, who puts the trade war scenario in context: “A trade war scenario at this stage is unlikely to materialize.” 

At least two things are different this time. As I said, the bill seems more likely to pass. And the administration has already tried to play the good cop too much thus far while the economic situation in the U.S. has continued to lumber along all-too-slowly. Tim Geithner did the right thing by trying to get other G-20 members on board – when you get a coalition going against it, China listens – but Treasury stopped short of labeling China a currency manipulator. And no suit has been filed at the WTO. 

This latest bill is a blunt instrument (though slightly less blunt than an across-the-board tariff). If the administration wanted to head off this action, it’s probably too late, but the next Treasury report is coming up on October 15. They could use that report to label China a “currency manipulator.” As C. Fred Bergsten of the Peterson Institute pointed out last year (via Sargent), that’s the first step in a more international set of actions that could be taken to pressure China to appreciate its currency. 

1. Label China as a “currency manipulator” in its next foreign exchange report to the Congress on April 15 and, as required by law, then enter into negotiations with China to resolve the currency problem. 

2. Hopefully with the support of the European countries, and as many emerging market and developing economies as possible, seek a decision by the IMF (by a 51 percent majority of the weighted votes of member countries) to launch a “special” or “ad hoc” consultation to pursue Chinese agreement to remedy the situation promptly.  If the consultation fails to produce results, the United States should ask the Executive Board to decide (by a 70% majority of the weighted votes) to publish a report criticizing China’s exchange rate policy. 

3. Hopefully with a similarly broad coalition, the United States should exercise its right to ask the World Trade Organization to constitute a dispute settlement panel to determine whether China has violated its obligations under Article XV (“frustration of the intent of the agreement by exchange action”) of the WTO charter and to recommend remedial action that other member countries could take in response.  The WTO under its rules would ask the IMF whether the RMB is undervalued, another reason why it is essential to engage the IMF centrally in the new initiative from the outset. 

The problem is real, and kudos to Congress for taking it seriously. But it’s unfortunate that the administration didn't take stronger, albeit more targeted, action that included international partners before now.

Comments

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Big bad China has done it again. Hopefully Europe will support the US in this. Kudos to (I agree) Congress but the Obama Admin may try to do more as well. The US is losing China in production and jobs.

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Well, to see that coming could be that the tides have changed and history has taken its course? The West have used WTO, IMF and WB to torture and coerce weaker nations to make their currencies strong. Now when a not-so-friendly nation finally manage to make it, the West starts to call foul and punish it?

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