Once again the US Congress is finding it more convenient to play the China currency card as the panacea for America’s economic woes, rather than deal with the difficult issues in President Barack Obama’s recent employment bill.
China’s response to the proposed bill pressuring it into allowing the renminbi to appreciate was predictable, with simultaneous protests from all the relevant agencies. Given the threat to the global economy from the problems in the eurozone and the US, China’s leadership regards the currency bill as a distraction from the real issues that need to be resolved. At a time when China is one of the few sources of global growth, ratcheting up protectionist sentiments only makes it harder to secure the necessary multilateral co-operation. The country’s government sees the currency debate as yet another sign of why the American political system is broken.
Beijing is quick to note that the history of rapid appreciation of the yen under the Plaza Accord under pressure from the US did not eliminate its trade deficit with Japan but in China’s view only contributed to the latter’s long-term economic ills. Moreover America’s trade deficit began to increase sharply in the late 1990s, well before China’s trade surplus began to take off in 2005. America’s trade problems are thus seen as stemming from its large fiscal deficits that emerged with increased military expenditures abroad.
Many within China thought that given recent developments, criticism of its exchange rate policies would become more muted. After all, China has continued its policy of gradual appreciation of 5-6 six per cent annually. With the euro crisis and strengthening US dollar, the renminbi has been the exception in appreciating, while other major currencies have depreciated. China also notes that its trade surplus has declined sharply from 7 per cent to 8 per cent of gross domestic product five years ago to a projected 1-2 per cent for this year. And while reserves continue to pile up, this is seen as having more to do with capital inflows seeking higher returns – encouraged by expansionary US monetary policies – than by misaligned exchange rates.
Moreover, Beijing argues that bilateral trade balances are meaningless in a world dominated by production networks using China as the assembly plant for the world. More than half of the country’s exports come from “processing” trade, with China accounting for some 20 per cent of the value produced and the rest from components imported from other Asian countries, Europe and America. China’s trade surplus comes from processing trade. Thus America’s large bilateral trade deficit is not really with China but with east Asia more broadly. Take the iPod: it is recorded as a $150 export from China to the US – yet only $5 of the value added originates in China, the rest comes from half a dozen other countries with the bulk accruing to Apple itself.
In this context if Congress gets its way, the net impact will not be more American jobs but reduced global demand and higher prices for US consumers. As the recent ‘Spillover Report’ by the International Monetary Fund concluded – a 10 per cent appreciation of the renminbi would have a negligible effect on the US trade balance or its GDP. The positive impact would be greater although still marginal for other Asian economies. Thus any jobs lost by China from a major appreciation would gravitate not to the US but to other developing countries.
Yet China has little appetite to turn this affair into a full-blown trade war since it has benefited greatly from open markets. Thus while the leadership will not let any perceived negative action go unchecked, its motivation will be to work towards constructive solutions. But there is a danger that in the transition to its next generation of leaders, Beijing may find it necessary to take a harder line in response to any perceived politically driven actions by the US.
America should worry more about maintaining its position at the upper end of the technology spectrum as China may feel the need to reinvent itself if the pressure to sharply appreciate its exchange rate continues. Currently China exports an unusually wide range of technologically sophisticated products for its income level. However, its high-technology exports are really processed finished products with the more sophisticated components coming from elsewhere. No wonder most US companies are more concerned about market access and technology transfer than futile currency wars.
The writer is a senior associate at the Carnegie Endowment and a former country director for the World Bank in China
The more China reaches, the more insecure it feels
Beijing has embarked on a relatively steady appreciation of the renminbi since shifting to a managed peg last year. The Obama administration is mostly satisfied with this slower pace and has refrained from using the levers available to pressure China for any more rapid adjustments. However, as Yukon Huang argues, the current US domestic situation may be conducive to using the China issue for political gain. When there is a tough economic problem at home that cannot be resolved easily or quickly, it is often politically expedient to accuse a foreign power of unfair practices. The debate alone can often serve as a rallying point for political support.
Whether the bill is a serious attempt to curtail trade or just a source of renewed rhetoric, China must still respond on the basis of potential implications, rather than the likelihood of passage or action. As Beijing’s power increases, and its economy pushes Chinese interests farther from home, it is increasingly in competition with Washington. But the more China reaches, the more insecure it feels, making it particularly sensitive to any perceived pressure from the US.
Domestic issues facing China today – including an economic slowdown and stability concerns – are pushing the government to avoid any rapid shift in the renminbi’s value. And with a leadership transition planned for 2012, China could yet determine it beneficial to ratchet up tensions with the US in response to the currency bill.
The writer is vice president of strategic intelligence and lead China analyst at Stratfor, a Texas-based private intelligence company.