Much of the blame for this failure of policy to date falls on the US Government, which has been unwilling to label China the currency manipulator that it has been so clearly for a number of years. The unwillingness of the United States to implement the plain language of the Trade Act of 1988 has substantially undermined its credibility in seeking multilateral action against China in the IMF, the WTO, the G-20 or anywhere else. A sensible and effective strategy must begin by reversing that feckless position [but Dr. Bergsten, how do you really feel?]Bergsten's China-bashing effort involves a rather optimistic sequence and, as you can read, a lot of "hopefully". First, Treasury must label the PRC a currency manipulator. Second, this action will supposedly prompt other aggrieved nations to impel the IMF into action by investigating China's antisocial currency practices. Third, the IMF having presumably determined that China is a currency manipulator, the anti-China bandwagon shifts fora to the WTO. At the WTO, the dispute settlement mechanism (DSM) can now rule on what sort of sanctions can be applied against China on the grounds that it violates Article XV of the GATT (text here).
Hence I would recommend that the Administration adopt a new three-part strategy to promote early and substantial appreciation of the exchange rate of the RMB:
1. Label China as a “currency manipulator” in its next foreign exchange report to the Congress on April 15 and, as required by law, then enter into negotiations with China to resolve the currency problem.
2. Hopefully with the support of the European countries, and as many emerging market and developing economies as possible, seek a decision by the IMF (by a 51 percent majority of the weighted votes of member countries) to launch a “special” or “ad hoc” consultation to pursue Chinese agreement to remedy the situation promptly. If the consultation fails to produce results, the United States should ask the Executive Board to decide (by a 70% majority of the weighted votes) to publish a report criticizing China’s exchange rate policy.
3. Hopefully with a similarly broad coalition, the United States should exercise its right to ask the World Trade Organization to constitute a dispute settlement panel to determine whether China has violated its obligations under Article XV (“frustration of the intent of the agreement by exchange action”) of the WTO charter and to recommend remedial action that other member countries could take in response. The WTO under its rules would ask the IMF whether the RMB is undervalued, another reason why it is essential to engage the IMF centrally in the new initiative from the outset.
As before, I believe that getting other countries to play along will the Peterson boys is a long shot. With so many developing countries still under "managed float" currency regimes similar to China's, it is unlikely that they will sign on to measures that will of course make them vulnerable to future currency bashing by Western nations in search of scapegoats. All the while, I can only wonder why Dr. Subramanian from India has such a narrow, parochial, and Amerocentric view of world politics.
And here's the punch line: a much more sensible voice is that of EC Trade Commissioner Karel de Gucht. Recently, the Belgian bigwig came to speak at the LSE and made much sense which is really no surprise as his current post is one of the most important posts in the EC. He basically scoffs at the notion that the EU will play along with an American action along these lines for the commonsense reason that China isn't likely to say yessuh, yessuh and back down easily:
Threatening China with WTO sanctions will not convince Beijing to revalue its currency, the European Union trade chief said following a meeting with his Chinese counterpart on Tuesday. Chinese Commerce Minister Chen Deming said the yuan was not undervalued and reiterated that China would only adjust the currency's exchange rate if it were beneficial to its own economy, EU trade commissioner Karel De Gucht said.Still, if the US is really up for it, I guess there's only one way to find out, eh?
"I am quite convinced that they are going to do it for themselves and that openly insisting on it and even thinking about procedures within the WTO...is not going to resolve the matter," De Gucht told reporters. According to World Trade Organisation rules, countries are not permitted to use their exchange rate policies to counteract commitments to open trade. This stipulation about exchange rates has never been tested in practice in a WTO case.