During the debt-ceiling debacle, Washington pushed the U.S. economy close to an abyss. Now it is risking U.S.-Chinese relations.
Two months ago, Chinese officials were appalled by the U.S. debt impasse. A month ago, Vice President Biden, after Washington’s summer-long debt drama, sought to assure Beijing that “a successful China can make our country more prosperous, not less.”
On Monday, weeks of pledges and assurances over joint U.S. and Chinese interests were nullified in a matter of hours as the Senate weighed “whether to punish China for undervaluing its currency and taking away American jobs.”
The proposed Currency Exchange Rate Oversight Reform Act of 2011would allow the U.S. government to slap countervailing duties on products from countries found to be subsidizing their exports by undervaluing their currencies.
It will achieve nothing to ease U.S. unemployment. It is straining U.S.-Chinese relations at the worst possible moment. And it will risk trade war at a time when Washington can least afford one.
Renminbi, an expedient scapegoat
Despite bipartisan backing, the legislation would face overwhelming hurdles before it becomes law. After all, the Obama White House, while believing Chinese renminbi to be undervalued, is wary of unilateral sanctions against China. This concern is widely shared by leading U.S. business groups, and even House GOP leaders show little interest in bringing the bill to a vote.
If, however, the bill has no effective bipartisan support and it is rejected by U.S. business, why does it have bipartisan backing?
The short answer is that political positioning for the 2012 presidential election is already trumping over economic rationality.
The topical answer is that, in political positioning, timing matters. It is hardly a coincidence that the Senate took up the bill on the very same day that the White House sent to Congress free trade agreements (FTAs) with South Korea, Colombia and Panama.
For months, a number of congressional Democrats have seen the FTAs as threats to U.S. jobs. With lingering unemployment, anti-incumbency mood and political volatility, renminbi serves as a convenient distraction. By supporting an ineffective currency bill, they have an opportunity to talk and appear tough on perceived unfair trade practices.
“China Emerges as a Scapegoat in Campaign Adds,” New York Times reported on mid-term elections in October 2010. In the second act, the renminbi serves as a smoke screen for three FTAs that makes Congress feel uneasy with.
Not a bilateral issue
In the past, surging food, fuel and other commodity prices in China have put greater pressure on China to allow a faster rise in the value of the renminbi, in order to contain inflation. At the same time, China’s Central Bank has continued its drive to appreciate the yuan, in order to fight imported inflation.
Even the current pace of appreciation means that China's trade surplus could diminish within half a decade, as inflation is likely to continue to push up the renminbi in REER (real effective exchange rate) terms.
Ultimately, the currency issue is not bilateral, or only between the United States and China. It is multilateral and regional.
Think about it: two to three decades ago, when you purchased a TV in the U.S., the label typically read “Made in Japan.” More recently, that label probably said “Made in Korea.” Today it says “Made in China.” During the past decade, the role of China in the U.S. trade deficit has climbed from 19% to 43%. So some observers have concluded that China is responsible for the U.S. trade deficit.
In reality, many of the goods America used to import came first from Japan, then from the East Asian tiger economies just as today they come from China. As many leading Asian companies have moved their export manufacturing base to China, “China’s” share of the U.S. trade deficit has risen in relative terms – in trade data, but not in money flows.
For instance, Apple has outsourced its production to Foxconn, whose production engines are in China. However, it hardly follows that China is engaged in unfair trade against the United States. Rather, China’s current share of the U.S. trade deficit reflects East Asia’s central role as the world factory.
Rebalancing is a two-way street
In a global economy with deficient aggregate demand, current-account surpluses are a problem. But there are no simple solutions.
After all, China has a bilateral and multilateral surplus, but so does Saudi-Arabia. In absolute value, Saudi Arabia’s multilateral merchandise surplus of $150 billion in 2010 is less than half of China’s $254 billion surplus. As a percentage of GDP, however, Saudi Arabia’s current-account surplus, at 15.8% of GDP, is more than threefold that of China.
In fact, China’s current-account surplus is actually less than that of Germany. As a percentage of GDP, it is 5.2%, compared to Germany’s 5.7% - and only a third of that of Saudi Arabia, which enjoys a 15.8% current-account surplus.
It would be mistaken to blame German exports for U.S. unemployment, or Saudi Riyal for America’s need for oil. Conversely, Washington hardly would like to hear Europeans accuse the U.S. for reckless budget deficits; or Brazil blame the U.S. for low interest rates that can lead to a weak currency; or the BRICspreach about the threats of imported inflation from the West.
In reality, many factors other than exchange rates affect a country’s trade balance, including national savings. America’s multilateral trade deficit will not be significantly narrowed until America saves significantly more.
Rebalancing is a two-way street. What G-20 nations need today is more cooperation, not confrontation – as in the 1930s.
Dan Steinbock is research director of international business at India China and America Institute (USA), visiting fellow at Shanghai Institutes for International Studies (China) and in the EU-Center (Singapore).