Sunday, 9 October 2011

China bashing not the solution !

World Trade Organization accession and membershipImage via Wikipedia


The US Senate is scheduled to vote this week on a “currency Bill” to allow actions against China’s imports. But blaming China may unleash a trade war without solving America’s problems.

IS China’s currency and trade performance a threat to the United States? Or are American politicians using China as a scapegoat for the country’s economic problems?

“China bashing” has been on the rise in the United States. It is widely thought that politicians of both parties are doing it to gain popularity in view of the coming elections.

For some years, Congress members have threatened to take action against Chinese imports to retaliate against what they see as China’s manipulation of its currency level.

The politicians say that the Chinese yuan is lower than what it should be if there were no government intervention.

They charge that the undervalued currency enables China to have a large trade surplus vis-a-vis the United States, and that this has caused the loss of American jobs.

These charges are refuted by the Chinese government, which argues that the US trade deficit is due to domestic factors and not Chinese policy. It also points to the 7% appreciation of the yuan versus the dollar in recent months.

This issue has been a central economic policy issue between the two major countries. It could escalate into a major battle on the ground.

The US Senate is scheduled to vote tomorrow on a Bill aimed at enabling import tariffs to be placed on Chinese imports as a retaliation against the alleged currency manipulation.

In a first step, the Senate on Oct 3 voted 79-19 to allow a week-long debate on the Currency Exchange Rate Oversight Reform Act of 2011. The Bill mandates a process for imposing tariffs on imports of a country with allegedly “misaligned currencies”.

Though China is not named, it is obviously the target. The Bill would in effect require the US Treasury Department to determine if China was manipulating the yuan. If it finds this to be the case, extra tariffs can be placed on some imported Chinese goods.

The Bill is expected to pass in the Senate. But a similar Bill has to also go through the House of Representatives, and be approved by US President Barack Obama, before trade measures can be taken.

These two steps are far from assured. Although it seems the majority of the House are in favour, Speaker John Boehner said last week it was dangerous to be moving legislation through Congress to force “someone to deal with the value of their currency ... while I’ve got concerns about how the Chinese have dealt with their currency, I’m not sure this is the way to fix it”.

Obama last Thursday accused China of “gaming” the trade system to the disadvantage of other countries, especially the United States. But he also expressed concern that the Senate Bill “may not actually work … as it may be only ‘symbolic’, and would probably not be upheld by the World Trade Organisation (WTO)”.

Nevertheless, the probability of the passage of the Senate Bill has heightened US-China tensions and raised the potential of a serious trade war.

As could be expected, Chinese government agencies and think tanks are reacting strongly to what they perceive as a protectionist move.

The People’s Bank of China (its central bank) said the Senate Bill would not help resolve the United States’ domestic issues such as the trade deficit, low level of savings and high unemployment, but could potentially affect the economy and market confidence.

It added: “The passage of the Bill may seriously affect China’s currency reforms, potentially leading to a trade war between the two sides.”

Xu Mingqi, deputy director of the Institute of the World Economy at the Shanghai Academy of Social Sciences, had this to say: “It is easy for the US to make China a scapegoat of its domestic problems at a time when its economy remains weak with a high unemployment rate and the next general election only 13 months away.”

In the event the Senate Bill makes its way into actual law, a dispute case will most likely be taken against the United States at the WTO.

WTO rules do not allow countries to impose punitive duties on the basis that a certain country’s currency is undervalued. That this is so is appropriate. Valuing currencies to see if they are “manipulated” is very complex and difficult.

For example, the United States has also been accused of pushing its currency down through its controversial policy of “quantitative easing” (central bank pumping of funds into the banking system).

And is Switzerland “manipulating” its currency by announcing it will not tolerate further appreciation of the franc?

Allowing the currency issue to be a subject of possible unfair practice open to trade sanctions will open the road to many other issues being similarly recognised, such as a country’s tax rates, interest rates, and labour and environmental standards. There will be no end to having reasons for new trade protectionism.

A US law based on the Senate Bill will probably be found to be inconsistent with US obligations in the WTO. But by the time the WTO dispute system panel makes a final ruling (this may take years), some damage may already be done should the United States act against Chinese imports in the meantime.

China may not take the US actions lying down, and can come up with retaliatory action on US goods. Thus, a trade war may be unleashed.

Interestingly, although some well known American economists like Paul Krugman and Fred Bergsten advocate US action against Chinese imports, some business associations as well as important newspapers like the New York Times, Wall Street Journal and Financial Times have come out strongly against the Senate Bill for its protectionism and trade war potential.

The high-pitched attack on China because of its large trade surplus with the United States is misplaced. Little of the gross surplus actually accrues to China.

A 2010 paper by the South Centre shows that only a small part of China’s exports to the United States is actually retained as income in China.

For example, in 2005, China’s gross trade surplus with the United States was US$172bil (RM543bil), but in value-added terms (what is earned by the respective countries after deducting the import content of their exports), it was only US$40bil (RM126bil).

Further, a large part of the Chinese trade surplus in value-added terms was earned by foreign firms in China and thus, does not belong to China. As a result, income left in China was no more than 30% of the total value of exports to the United States.

Therefore, the criticism that China enjoys extraordinarily high trade surpluses with the United States is misplaced.

Also, even if US trade measures reduce Chinese imports into the United States, this does not mean that the US import bill will be reduced.

Goods from other developing countries such as Vietnam or Indonesia may just replace the Chinese goods.

Therefore, US actions based on the Senate Bill would hardly help the United States get rid of its trade deficit.

It is best that the United States take domestic actions to address its domestic economic problems, rather than make a scapegoat of other countries and potentially unleash new trade wars.

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