By George A. Pieler and Jens F. Laurson
Is the yuan (renminbi to the cognoscenti) artificially undervalued to boost Chinese exports? Is the dollar? Does China measure up to modern standards of openness to trade and investment? Does the US? The tentative consensus is “yes”, “somewhat”, “no”, and “yes, but.” When it comes to US-China relations on currency, capital flows, and trade, China is pulling up the rear, but neither country comes to this debate with clean hands.
Still, there is reason for US concern. China does not let market forces value its currency. Instead it dictates a narrow trading band for buying and selling renminbi. Although China has been very slow in opening its own, huge market to imports, US exports to China “have almost doubled in the past five years” (Bloomberg). That doesn’t prove the bilateral trade imbalance is caused by controlling its currency, but it’s consistent with that narrative.
The yuan has been overvalued by as much as 40% relative to the idealized (but calculable) value based on its economic fundamentals. It remains overvalued by some 12% according to the US Congressional Research Service. Although the Chinese currency has declined relative to the dollar as of late (helped by a flight-to-safety as the Euro threatens to implode), since 2007 it has risen by over 20 percent. During the same period the dollar has fluctuated too: a significant decline during the 2007-2008 recession; strengthening more recently.
Fluctuated relative to what, you ask: Relative to gold, the euro, and (until recently) the yuan. With so many geopolitical factors in the US, Europe and Asia playing into this, it becomes hard to isolate the artificial-currency-management. That’s why it seems overkill for Presidential aspirant Mitt Romney and other politicians and commentators to keep putting so much emphasis on formally labeling China a currency-manipulator and using that to impose compensatory tariffs on Chinese exports to the US. The Romney gambit echoes legislation passed by the Senate last October which directs the Treasury to make that currency-manipulator determination and impose countervailing tariffs.
The Obama administration meanwhile has been carefully triangulating on the issue of economic relations with China. The official US position is that China manipulates its currency (which should be allowed to float freely on global markets), but that the problem is under control right now and that China’s moves towards letting the yuan decline in value are most welcome.
Yet the Obama administration is hitting China in a more sensitive area: threatening it with penalties for selling solar panels and wind turbines below-cost on the US market. These moves play into the administration’s narrative that failing clean-energy subsidies are the result of forces beyond its control—Chinese dumping, not the consequence of its ideologically, rather than economically founded alternative energy schemes. Unsurprisingly China hit right back with a WTO complaint arguing the US is illegally subsidizing its clean-energy industries across-the-board. (Incidentally, they have a point.)
When economic times are tough, China-bashing becomes an inevitable election year activity. That isn’t surprising, but it begs the question whether it will be tempered by the US’ economic self-interest, and whether the Chinese response will be constrained by prudence.
In that regard, at least the new Chinese WTO complaint brings in an independent arbiter that can help avert all-out trade war. The US anti-dumping complaints—outgrowth of that election year dynamic—are different, and may be cause for concern. Not the least because so many US companies save money using Chinese imports as industrial inputs (including those cheap solar panels), meaning there is a serious blowback risk in going after China-trade for domestic political gain. Higher-cost industrial inputs from China may produce worse economic results for the US than any actual or real gains from restraints on Chinese dumping might offset.
Overlaying all these disputes is a larger issue: will the dollar survive as the world’s reserve currency and will the yuan supplant it (or supplement it) in that function? That is not a predictable event, and China has only begun to open up its capital markets and let the yuan trade more freely. As Gordon Chang points out, “as long as Beijing depends on investment fueled by cheap money to create growth, it must maintain its controls [on yuan convertibility]”. Since China’s financial markets are considerably less open than its goods and services markets. China’s yuan remains some distance from being a viable reserve currency with a stable and predictable store of value. The recent launch of direct yen-yuan trading in Tokyo and Shanghai however, demonstrates China’s increasingly global aspirations for its currency.
The dollar’s future status is also unclear, as US domestic priorities trump reserve-currency concerns for the foreseeable future. The US Federal Reserve is determined to keep interest rates low, regardless of the global economic consequences. The turmoil in Europe has conveniently made this goal relatively easy to achieve without the dollar losing preferred status. No crisis lasts forever though, and no one disputes the global economy is rebalancing itself in a more Asia-centric direction. This is one reason Nobel Prize-winning Canadian economist Robert Mundell predicts a future reserve currency basket embracing the dollar, the yuan, the yen, and others.
Two lessons can be taken away from this. First: Governments do not make economic decisions—they make political decisions with economic consequences. Second: No government, however aggressive in managing its economic relations with other nations and private investors, is immune from the magic of the marketplace. China may limit the trading range of the yuan, but it can’t achieve the global status it wants without relaxing those limits or without offering greater certainty to foreign investors that the state will not clamp down on trade and finance.
Nor can the US forever maintain a zero-interest rate policy without suffering consequences: either inflation, flight from the dollar, or massive misallocation of resources. Much is made of US dependence on China to buy up its debt so that it can keep running trillion-dollar annual deficits in a desperate pursuit of fiscal stimulus. Yes, China holds a big chunk of that debt, around 11 percent. It is not clear, though, why China would suddenly dump US debt to make a grand gesture of defiance. As much as the US wants China to buy its debt, China wants to buy that debt for its own investment-diversification purposes and it depends on the US as its primary export market. It is a situation of mutual benefit. It’s also something of a constraint on US efforts to pressure China on human rights, strategic relations (e.g. North Korea), and economic openness, which may seem a nifty bonus for the Chinese government. But mostly it helps keep US-China disputes from getting wholly out of hand.
Until and unless global finance finds itself a new anchoring device (that currency basket, or gold, or some other agreed-on secure measure of value to govern currency and monetary relations), currency manipulation in a myriad of forms will be an unavoidable part of the political economy. In the meantime, the safety-valves provided by the WTO, the G20, and other forums for airing transnational disputes ought to keep the US-China friction at manageable levels where mutual dependence doesn’t. But really, given that close interdependence of the two nations it’s hard to avoid the slogan: US and China—perfect together.
George Pieler, is an attorney and policy consultant. Jens F. Laurson is Editor-at-Large of the Center for International Relations’ International Affairs Forum.
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