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.