Preview: US Branding China a Currency Manipulator

♠ Posted by Emmanuel in , at 2/18/2010 12:03:00 AM
We are nearing that time of year when the US Treasury is required by Congress to report on the currency practices of trade partners as per the Omnibus Trade and Competitiveness Act of 1988. Originally devised with Japan in mind, this act has since been turned into a biannual ritual held in April and October. Once more, we get to see whether those hawkish on China are finally getting the upper hand. Last year, I said Treasury Secretary Tim Geithner wimped out on doing so; and he did so again in October. This year, we are running over the same old ground once more. Since the surrounding issues are well know, let me just bring you two articles portending what may come. First up is the Wall Street Journal:
"We expect to see actions by China" to help rebalance global trade flows, a White House official said. If Beijing fails to act, that "will put greater and greater pressure on the U.S. to respond."

"We have 10% unemployment and China is racking up huge trade surpluses with an undervalued currency—the politics [of that] are very tough," said Kenneth Lieberthal, a former Clinton administration official who now heads Brookings Institution's John L. Thornton China Center in Washington...

But lately, many elements of U.S-China cooperation have been put to the test. While the value of the yuan has long concerned U.S. politicians and business, the rhetoric is heightening as the U.S. continues to grapple with high unemployment and China hits new growth benchmarks. In a meeting with Senate Democrats this month, Mr. Obama vowed to "get much tougher" with China on trade rules, including currency rates, to ensure that U.S. goods weren't at a competitive disadvantage. The U.S. says its trade deficit with China totaled $226.83 billion in 2009—narrower than the annual deficits from 2006 to 2008, but still the U.S.'s largest imbalance with any nation...

The next big test comes in April, when, under the Omnibus Trade and Competitiveness Act of 1988, the U.S. will decide whether to label Beijing a "currency manipulator." Such a move technically wouldn't result in any U.S. actions against China. But invoking the rarely used act—no countries have been named since 1994—would likely infuriate Beijing and give Congress new ammunition to press for concrete action against China...

A senior Treasury Department official said no decision on the matter has been made. Treasury Secretary Timothy Geithner said during his Senate confirmation hearings in early 2009 that Mr. Obama believed China was manipulating its currency. But the administration declined in its semiannual Treasury Department report that April to officially label China a manipulator.

Some U.S. lawmakers are also considering steps to address the Chinese-currency issue. Sen. Chuck Grassley, an Iowa Republican, will "evaluate legislative options" if the administration doesn't label China a manipulator, said Grassley spokeswoman Jill Kozeny.
Alike most, the WSJ article believes that China will not be bullied into getting the yuan to revalue prior to the April decision. Now let us turn our attention to the Reuters article on the same issue. Unlike the WSJ, it is more bullish on the prospects of Chinese movement on the currency--for its own interests as President Obama and the WSJ suggest as well:
Beijing is likely to let its currency begin rising in value again this year in response to growing pressures at home and abroad, two U.S. private sector specialists on China said on Wednesday. "I think China has been waiting for its exports to resume growth, which they started to do in December. That, I think, gives them the domestic cover they need to resume (a) gradual appreciation," John Frisbie, president of the U.S.-China Business Council, said during a panel discussion.

President Barack Obama pushed China's exchange rate practices to the top of the bilateral agenda this month when he complained countries that undervalue their currency put U.S. companies at a huge competitive disadvantage...

Charles Freeman, a former U.S. trade official now at the Center for Strategic and International Studies, said he agreed Beijing would allow the yuan to rise gradually this year "as long as (its) exports don't drop through the floor." Many within China who "are deeply upset that they continue to have to spend hundreds of billions of dollar every year" to suppress the value of the currency, Freeman said. "So you know, there are pressures internally in China to appreciate the renminbi for its own purposes and I'll we'll see an appreciation this year," said Freeman, who worked on China issues at the U.S. Trade Representative's office.

Beijing allowed its currency to rise about 20 percent between July 2005 and July 2008, but put on the brakes to help stabilize its exports when the global financial crisis hit.

Obama's recent comments have raised speculation his administration might label China a "currency manipulator" in an semiannual Treasury Department report due on April 15. "My gut is it doesn't out-and-out name China a currency manipulator, but it comes awful close," Freeman said. "I think the administration's approach is going to be to shake a big stick on appreciation and, when they move, declare victory," he said.
I think the latter statement will be prove to be on the money. Obama will make a big stink about the matter in the run-up to the April 15 report. Once more, being branded a manipulator paves the way for punitive legislation such as the infamous Super 301. Whether legislators take up the matter in the likely non-declaration is another matter, but past history suggests we shouldn't be too surprised if talk of more China-bashing legislation falls by the least until October when this circus starts up again.