Global Trends by Martin Khor

Monday 10 October 2011

China bashing won’t solve US problems

The United States Senate is scheduled to vote this week on a “currency bill” to allow actions against China’s imports. But bashing China may unleash a trade war without solving America’s problems


Is China’s currency and trade performance a threat to the United States?  Or are American politicians using China as a scapegoat for the country’s economic problems?

China bashing” has been on the rise in the US.  It is widely thought that politicians of both parties are doing it to gain popularity in view of the coming elections.

For some years, Congress members have threatened to take action on Chinese imports to retaliate against what they see as China’s manipulation of its currency level.

The politicians say that the Chinese yuan is lower than what it should be if there were no government intervention.

They charge that the undervalued currency enables China to have a large trade surplus vis-ŕ-vis the US, and that this has caused the loss of American jobs.

These charges are refuted by the Chinese government, which argues that the US trade deficit is due to domestic factors and not Chinese policy.  It also points to the 7% appreciation of the yuan versus the dollar in recent months.

This issue has been a central economic policy issue between the two major countries.  It could escalate into a major battle on the ground.

The US Senate is scheduled to vote this Tuesday on a bill aimed at enabling import tariffs to be placed on Chinese imports as a retaliation against the alleged currency manipulation.

In a first step, the Senate on 3 Oct voted 79-19 to allow a week-long debate on the Currency Exchange Rate Oversight Reform Act of 2011.   The bill mandates a process for imposing tariffs on imports of a country with allegedly “misaligned currencies”.

Though China is not named, it is obviously the target. The bill would in effect require the US Treasury Department to determine if China is manipulating the yuan.  If it finds this to be the case, extra tariffs could be placed on some imported Chinese goods.

The bill is expected to pass in the Senate. But a similar bill has to also go through the House of Representatives, and be approved by President Barrack Obama, before the trade measures can be taken.

These two steps are far from assured. Although it seems a majority of the House are in favour, the Speaker John Boehner said last week it is dangerous to be moving legislation through the Congress “forcing someone to deal with the value of their currency….While I've got concerns about how the Chinese have dealt with their currency, I'm not sure this is the way to fix it.

Obama last Thursday accused China of “gaming” the trade system to the disadvantage of other countries especially the US.  But he also expressed concern that the Senate bill “may not actually work… as it may be only “symbolic” and it is   probably not going to be upheld by the World Trade Organization (WTO).

Nevertheless, the probability of the passage of the Senate bill has heightened US-China tensions and raised the potential of a serious trade war.

As could be expected, Chinese government agencies and think-tanks are reacting strongly to what they perceive as a protectionist move.

The People's Bank of China (its central bank) said the Senate bill will not help resolve the United States’ domestic issues such as the trade deficit, low level of savings and high unemployment, but could potentially affect the economy and market confidence.  It added: "The passage of the bill may seriously affect China's currency reforms, potentially leading to a trade war between the two sides.”

"It is easy for the US to make China a scapegoat of its domestic problems at a time when its economy remains weak with a high unemployment rate and the next general election only 13 months away," said Xu Mingqi, deputy director of the Institute of the World Economy at the Shanghai Academy of Social Sciences.

In the event the Senate bill makes its way into actual law, a dispute case will most likely be taken against the US at the WTO.

The WTO rules do not allow countries to impose punitive duties on the basis that a certain country’s currency is undervalued.  That this is so is appropriate.  Valuing currencies to see if they are “manipulated” is very complex and difficult.

For example, the US has also been accused of pushing its currency down through its controversial “quantitative easing” policy (central-bank pumping of funds into the banking system).  And is Switzerland “manipulating” its currency by announcing it will not tolerate further appreciation of the franc?

Allowing the currency issue to be a subject of possible unfair practice open to trade sanctions would open the road to many other issues being similarly recognized, such as a country’s tax rates, interest rates, labour and environmental standards. There will be no end to having reasons for new trade protectionism.

A US law based on the Senate bill will probably be found to be inconsistent with US obligations in the WTO. But by the time the WTO dispute system panel makes a final ruling (this may take years), some damage may already be done should the US act against Chinese imports in the meanwhile.

China may not take the US actions lying down, and could retaliatory action on US goods.  Thus a trade war may be unleashed.

Interestingly, although some well-known American economists like Paul Krugman and Fred Bergsten advocate US action against Chinese imports, some business associations and important newspapers like the New York Times, Wall Street Journal and Financial Times have come out strongly against the Senate bill for its protectionism and trade-war potential.

The high-pitched attack on China because of its large trade surplus with the US is misplaced. Little of the gross surplus actually accrues to China.

A 2010 paper by the South Centre shows that only a small part of China’s exports to the US is actually retained as income in China.

For example, in 2005, China’s gross trade surplus with the US was $172 billion but in value added terms (what is earned by the respective countries after deducting the import content of their exports) it was only $40 billion.

Further, a large part of the Chinese trade surplus in value-added terms was earned by foreign firms in China and thus does not belong to China.  As a result, income left in China was no more than 30 per cent of total value of exports to the US.

Therefore the criticism that China enjoys extraordinarily high trade surpluses with the US is misplaced.

Also, even if US trade measures reduces Chinese imports into the US, this does not mean that the US import bill will be reduced.  Goods from other developing countries such as Vietnam or Indonesia may just replace the Chinese goods.

Therefore, US actions based on the Senate bill would hardly help the US get rid of its trade deficit.

It is best that the US take domestic actions to address its domestic economic problems, rather than make a scapegoat of other countries and potentially unleash new trade wars.