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Clyde Prestowitz – China manipulating its currency.
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US call for IMF, WTO to move on Renminbi
24-05-2010
April/May 2010 ATI Magazine
WASHINGTON — Should the World Trade Organisation or the International Monetary Fund be drawn into the running dispute between the United States and China over the renminbi exchange rate? According to leading US economists, the answer is ‘yes’.
Their argument is that this is not a bilateral issue — that it involves the principles of free trade and of fair pricing of currencies in a globalised world – principles which are overseen by these two multilateral agencies.
A number of US economists recently appeared before the US Congress House Ways and Means Committee, which has jurisdiction over international trade matters. The Committee was looking into the impact of the undervalued Yuan on the US economy. They were unanimous that the US should take a multilateral approach, saying it is not an issue that can be resolved satisfactorily on both sides bilaterally without fracturing on already tense relationship.
Economists Clyde Prestowitz, Niall Ferguson and Philip Levy argued that other nations should be drawn into the issue. Japan was forced to revalue its currency only after the Plaza Accord, involving its major trading partners, was signed off in 1985. Under the Accord, the US dollar was devalued.
In the Congressional hearing, before Sandy Levin, Democratic Chairman of the House Ways and Means Committee, Levy, who is a resident scholar of the American Enterprise Institute, suggested that the US press a case against China through the WTO, which has a provision that says, in part, that contracting parties will not, by exchange action, frustrate the intent of the provisions of a trade agreement.
Levy says each unilateral approach by the US to China is marred by inescapable bilateral tension and by difficulty in setting global rules without a broader consensus, particularly in the absence of clear technical answers.
“Multilateral approaches avoid both these difficulties,” he says. “Setting aside enforcement problems, the IMF would be the appropriate institution under which to establish new norms for international financial behaviour, if agreement on those norms could be reached.” If agreement on new norms could not be reached under the auspices of the IMF, an alternative would be to push for an agreement on principles through a grouping such as the G7, he says.
Niall Ferguson, an economics professor at Harvard Business School, who coined the term Chiamerica, noted that, while West Germany and Japan grew their exports and reserves, they did not resist currency appreciation in the way that China has. (Between 1960 and 1978, the deutschmark appreciated by almost 60 per cent against the US dollar, while the yen appreciated by 50 per cent.)
So how much is the Chinese currency undervalued? Estimates range widely from zero to 50 per cent, depending on methodology. According to Ferguson’s estimates, China has a 25 per cent advantage in wage competitiveness. Manufacturing production today in China is much cheaper in dollar terms than it was eight years ago.
Fred Bergsten, director of the think-tank, the Peterson Institute for International Economics, played a key role in the formative years of the Asia Pacific Economic Co-operation (APEC) forum. He says the RMB is undervalued by about 25 per cent on a trade-weighted average basis, and by about 40 per cent against the dollar. Bergsten quoted the IMF as saying that, at current exchange rates, China’s surplus (at around US$2.4 trillion) will exceed the global deficit of the US by 2014. In a world where high unemployment and below par growth are likely to remain widespread for some time (including in the US), China is exporting very large doses of unemployment to the rest of the world, including the US, Europe, and many emerging market economies — including Brazil and India, he says.
The competitive undervaluation of the Chinese RMB and the currencies of several neighbouring Asian countries has had a very substantial impact on the US. An appreciation of 25-40 per cent is needed to cut China’s global surplus even to 3-4 per cent of its GDP — a realignment of that magnitude would produce a reduction of US$100-$150 billion in the annual US current account deficit, says Bergsten.
Every US$1 billion of exports supports about 6,000 – 8,000 jobs in the US, and such a trade correction would generate an additional 600,000-1.2 million US jobs.
Bergsten noted that the two preferred strategies for promoting Chinese action – sweet reason and implementation of multilateral rules, especially in the IMF – have to date had
limited success. Other efforts should continue, however, he says, and it is particularly important that any stepped up initiatives toward China be multilateral in nature. Bergsten also wants the WTO to constitute a dispute settlement panel to determine whether China has violated its obligations under its charter, and to recommend remedial action that other member countries could take in response.
“A US effort that encompasses unilateral, IMF and WTO dimensions, is likely to be the most effective strategy we can undertake at this time,” he says. “The Chinese are much more likely to respond positively to a multilateral coalition rather than bilateral pressure from the United States — especially if that coalition contains a number of emerging market and developing economies whose causes China frequently claims to champion.”
The President of the Economic Strategy Institute, Clyde Prestowitz, says China is manipulating its currency by intervening constantly in currency markets to maintain the nominal value of its currency at a fixed rate to the dollar. Many East Asian countries are also managing their currencies to facilitate their export competitiveness into the US market.
Rather than making this a bilateral issue, it is clearly preferable that some multilaterally-negotiated arrangement be achieved, perhaps in the G20, the WTO or the IMF.
“How laughable it is that countries put enormous effort into the WTO to lower tariffs while ignoring exchange rates which can easily move by a magnitude greater than the value of the tariffs the WTO system has reduced; or that the IMF can discuss currency values and exchange rates without reference to trade and investment,” says Prestowitz.
He adds: “Negotiations similar to those of the Plaza Agreement should be launched immediately to co-ordinate a substantial (40-50 per cent) revaluation of a number of managed Asian currencies versus the dollar and the Euro over the next two to three years. This would also have to entail an agreement to halt strategic currency management activities.”
He says that, after this initial deal, the IMF or a new body representing the major currencies must continue to co-ordinate policy and the management approach to currency adjustment. He adds that, if starting such discussions proves difficult, the US, in concert with other affected countries, could initiate unfair trade actions under domestic laws — and also under anti-subsidy, nullification and impairment provisions of the WTO.
US politicians want the Obama Administration to brand Beijing as a
“currency manipulator”, which would then require Washington to impose duties on Chinese imports. The Bill Currency Exchange Rate Oversight Act has been introduced following growing tensions over China’s exchange rate policy.
US Treasury Secretary, Tim Geithner, was due to release a report to Congress on China’s currency on April 15, but chose to withhold this until after a visit by Chinese President Hu Jintao to Washington on April 12-13. There were some expectations that Beijing might make some concessions during the visit.
Geithner said he decided to delay publication mainly because of a number of key meetings in coming months at the Group of 20, and bilateral talks within the Strategic and Economic Dialogue with China, during which he aimed to make “material progress” on China’s exchange rate, and bring about a more “sustainable” global economy.
Sandy Levin agreed with the delay, saying that it is for a definite period and for a defined purpose. It is to see if, in the next few months, the international community does address the causes of major global imbalances, including China’s substantial undervaluing of its
currency. If multilateral efforts do not result in China making significant changes, the Administration and Congress will have no choice but to take appropriate action.
The Treasury announcement came after it emerged that Beijing may adjust its policy of pegging its currency to the dollar provided the visit in April by Hu went smoothly, according to a top adviser to China’s central bank.
The move drew strong reaction on Capitol Hill, where lawmakers have been putting pressure on the administration to take a tougher stance on China’s currency policy. Powerful politicians such as Chuck Schumer, the New York Democrat, argue that the renminbi is being kept at artificially low levels, putting American companies at a competitive disadvantage. They are calling for legislation that would impose sanctions on China if it does not let its currency appreciate.
China allowed the renminbi to appreciate 21 per cent against the dollar between July 2005 and July 2008, but then repegged the currency to help its export sector during the economic crisis.
“The Administration may choose to
delay its decision on whether to cite China [as a currency manipulator], but we won’t delay our push for legislation,” said Schumer. “After five years of stonewalling, punctuated by occasional, but halting action by the Chinese, we have lost faith in bilateral negotiations on the issue.” |
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