China’s yuan rebuttal puts U.S. in a bind

March 15, 2010

Name-calling doesn’t hurt — unless the tag happens to be “currency manipulator”. U.S. Treasury Secretary Tim Geithner has a month to decide whether to lay that epithet on China in his half-yearly report. Premier Wen Jiabao’s muscular denial this weekend that the yuan is undervalued makes that more likely. But retaliation would be costly for the United States.

Americans worry that a cheap yuan helps China’s exports and undermines U.S. manufacturers. President Barack Obama called on China to take a more “market-oriented” approach to its currency on March 11. The 46 percent increase in Chinese exports in February, even as new data showed U.S. wages on a declining trend, raises the stakes.

Wen’s denial puts Geithner in a bind. Speak the dreaded words, and Geithner must enter negotiations with China on its currency policy. But those may go nowhere. China firmly regards its currency as a matter of domestic, not international, policy. Its giant and growing trade surplus, however, tells a different story.

The United States could appeal to the International Monetary Fund to impose sanctions. But Geithner would have to demonstrate that China was seeking an unfair trade advantage when it suspended yuan appreciation. China argues its exchange rate policy is merely a protective shield for a young economy. Such currency twiddling is allowable under IMF rules.

Bleating to the World Trade Organisation is another option. Geithner could argue that China’s cheap currency is a subsidy to its exporters and a tax on importers. But the case is fuzzy. Subsidies usually target one industry, but China’s currency policy affects the whole country. It might also be tough to prove that U.S. firms were materially injured.

The United States could still slap unilateral, and probably illegal, tariffs on Chinese goods — as senators demanded last month. But China may respond by doing likewise. The only guarantee is that by branding China a currency manipulator, Geithner would strain already tense relations between the trade superpowers.

Regardless of the rhetoric, giant imbalances between the two countries still exist. China continues to amass vast foreign exchange reserves and fund America’s colossal deficit by hoovering up U.S. Treasury bonds. Whatever the two superpowers say — or don’t — a painful adjustment for both will become necessary.

CONTEXT NEWS
– Premier Wen Jiabao on March 14 rejected criticism that China’s currency is kept artificially cheap to boost exports.
– In a press conference to mark the end of the 10-day National People’s Congress, Wen stated that Chinese policymakers “do not believe the yuan is undervalued”. He warned against “strong measures” to force countries to appreciate their currencies, and pledged to keep the yuan “basically stable”.
– The U.S. Treasury Department has the option to label China a “currency manipulator” in its semi-annual report due on April 15. If it does, the department must begin negotiations with China, which could lead to sanctions. President Obama said before his election that China’s trade surplus was a result of its “manipulation of its currency’s value”.
– China abandoned its fixed currency peg against the dollar in 2005. Since then, the value of one yuan has risen from $0.12 to $0.15, and from 0.10 euros to 0.11 euros.

Comments

Someone has to do the dirty job and this time is Tim Geithner’s turn. He is already burned because all the unpopular Wall Street’s bailout so he will be the one to impose taxes on Chinese imports. China can’t stop to buy T-bonds because not doing so will benefit the USA export competitive advantage. Most likely what will happen is that a big economic crisis will devastate China, but their political game will be (as usual) to blame the imperialistic USA for China’s misfortunes.
Only USA companies with operations in China will suffer, or better phrased only the companies are not already preparing USA manufacturing operations will suffer. This idea that we depend on China’s cheap labor otherwise prices will rise is just not true. We depend only on our own productivity; we don’t need the $1/hr Chinese. We need to increase the productivity of the $30/hr American.

Posted by axiom321 | Report as abusive
 

It’s time for China’s economy to officially be considered a muture one. Likewise, the rules need to be applied.

Posted by JTX | Report as abusive
 

It is what it is.

Posted by breezinthru | Report as abusive
 

China owns 40% of our debt…we need to do what they say…or else….we put ourselves in this position, spending trillions on wars we didn’t have

Posted by STORY-BURN | Report as abusive
 

We best be carefull of what we say concerning China! They hold too much of our debt and they are slowly selling off their holdings each month. The more we chide them the more hardened they will become. We put our selves into that position with this crazy borrowing and it will come back to haunt us. Interest rates will rise sooner than expected if they keep on selling.

Posted by rv6672 | Report as abusive
 

It’s only 20% (about 0.8 trillion of 3.8 trillion) – not quite significant yet.

Posted by Mott | Report as abusive
 

It is a hard decision to make but the cost of doing nothing in the long run could be disastrous. Our economy could grind to a halt (already happening), our currency will become worthless and we will have no tax revenues to fund our government. If China won’t play fair, why should we?

Posted by ronryegadfly | Report as abusive
 

trade war coming…coming soon.

it’s the only game left after the monopolies grab up all they can, dump all their workers, and get all tied up in bogus securities.

watch out people…we can all get hurt real bad on this one.

no watchman at the helm. and even if there were, who watches the watchmen?

Posted by jborrow | Report as abusive
 

I’m not afraid of China and neither should you be. They sell us lead-tainted toys and we give them worthless pieces of paper. Sounds like a fair trade to me.

Posted by twiddledee | Report as abusive
 

Dumping of U.S. treasuries is a hollow threat. Other nations would quickly snap them up or, if they didn’t, the Federal Reserve would. After all, in just the last year, the Federal Reserve bought more treasuries than all of China’s holdings. They could easily do it again.

Posted by Pete_Murphy | Report as abusive
 

So what? Are we affraid of China???

Posted by Watcher23 | Report as abusive
 

@ronryegadfly

“… our currency will become worthless”

Don’t worry. It’s still worth 6.828 Yuan. It’s only gone down by 20% in the last 5 years! We are safe.

Posted by YesBut | Report as abusive
 

Obama and Geithner have lost it. They should know that naming China as a currency-manipulator would bring no advantages to an already weakened US economy. While the US is China’s biggest market, China exports large amounts of goods to other places like Australia who might not be so willing to co-operate against China. In the end, this trade war will only hurt American firms trying to push into China. And dumping bonds is not actually hollow, its real and happening. Other countries no longer have the financial means to buy our bonds, most governments are in tonnes of debt after the bailout and stimulation programs

Posted by civictyper | Report as abusive
 

It would be great for the USA if China dumps their T-Bonds. It would drive the dollar down and that will bring a lot of manufacturing to the US and create many jobs.

Posted by axiom321 | Report as abusive
 

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