♠ Posted by Emmanuel in China,Currencies
at 8/14/2011 09:50:00 PM
I was doing the usual thing trawling through newswire features on Yahoo! News when I came across a rather fantastically titled Reuters piece on how China may be the "worst protectionist ever." Reading the article in question, we gather that the person who said this was none other than Fred Bergsten of Peterson Institute fame. I've found his previous arguments on the subject matter logically suspect, and I must confess the same here. According to Bergsten in a recent speech, China has set new standards for protectionism through its massive accumulation of reserves to keep dollar artificially overvalued and, conversely, the yuan artificially undervalued. So far so true.
However, how is this sort of unprecedented protectionism dealt with at international institutions largely formed at America's behest? The answer, of course, is that it isn't. The IMF does not have sanctioning power over such actions and nor does the WTO. Once more, however, Bergsten is urging that the WTO become the tool with which to bash China over exchange rates. Aside from the wisdom in biting the hand that feeds, the larger question remains what the perception of other countries that have logically put faith in export-led development would make of such an action. In Friedrich List's parlance, it would constitute a most egregious instance of kicking away the ladder. Krugman may demur, though.
Below I have the key excepts. Let's begin with the casus belli:
Yet China has intervened massively in the foreign exchange markets for at least five years, buying at least $1 billion every day to keep the dollar strong and its own renminbi weak. The result is an undervaluation of the renminbi of at least 20 percent, which is the equivalent of a subsidy of 20 percent on all China’s exports and an additional tariff of 20 percent on all China’s imports. This is by far the largest protectionist measure adopted by any country since the Second World War—and probably in all of history.And then we have The Bergsten Solution. I particularly like the fanciful notion of US counterpurchases of yuan to offset China's dollar purchases. While I must admit being charmed by this whimsical idea, the last time I checked RMB was not freely trade internationally--let alone in amounts substantial enough to affect the USD/RMB exchange rate. But that's just silly me...
We will also have to get much tougher with some of our foreign partners. The Treasury Department, for example, has never been willing to label China a "currency manipulator" despite its blatant manipulation and the law of the land that directs Treasury to do so and then launch negotiations to remedy the situation. We could take China to the WTO for violating that organization’s proscription (like that of the IMF) of competitive undervaluation and sharply limit its access to our market if the case prevailed. We could initiate "countervailing currency intervention," buying Chinese renminbi to offset the effect on our exchange rate of their massive purchases of dollars [my emphasis].So low politics (China's growing economic prowess) now exceeds high politics (Axis of Evil Jnr) in his estimation. And the US must somehow buy scads of scarcely available RMB. Plus, risking the demise of acquiescence to the current international economic order is small fry compared to bashing China--nevermind that the renminbi is currently appreciating at a fairly rapid pace in a bid to counteract domestic inflation.
The combination of carrots and sticks will be particularly important with respect to China. On the one side, China wants the United States to recognize it as a "market economy" (rather than a centrally planned economy), to protect it from some of our trade safeguard measures, and assurances that the United States will permit its companies to invest here without running afoul of national security blockages. On the other side, we will have to place higher priority on our economic interests with China than on seeking its cooperation vis-à-vis North Korea, Iran, or other security issues (where it has not been very helpful anyway). In any event, we will almost certainly have to strengthen the informal de facto "G-2" between our countries because very few international issues can be resolved successfully in the 21st century without extensive understanding—even when that amounts simply to agreeing to disagree—between China and the United States.
While I am certainly all for rebalancing the world economy alike Bergsten, I doubt whether any of these actions are sane courses of action that will achieve widespread international buy-in for reasons given above.
