Start the conversation
By Jason Simpkins
By announcing a record-setting global trade surplus of $26.9 billion for June, China has re-ignited allegations that it’s engaging in unfair trade practices. The positive trade balance for June represented an 85% increase over the same month a year ago, China’s General Administration of Customs announced in a statement that was posted on its Web site yesterday. Total trade for the first six months of this year was $980.9 billion, with a surplus of $112.5 billion, and China is projecting full-year trade totals of $2 trillion with a record surplus of $200 billion.
Trade tensions between the United States and China go back a long way, and at various times have centered on disagreements over intellectual property, subsidies, trade barriers, and even recent concerns about product liability. But none of these issues were ever as emotionally charged as the friction that’s developed over China’s currency valuation, and the growing U.S. trade deficit with its Asia trading partner. Back in June, the still-spiraling tensions induced Congress to draft legislation that would punish China for its alleged trade infractions, as militant lawmakers repeatedly referred to China as a “currency manipulator.” The Bush Administration refused to cite China for this very serious global-markets infraction, a stance that brought an outcry from congressional leaders, though it also seemed to defuse the emotion of the moment.
Congressional leaders and some economic experts contend that China’s currency, the Yuan, is drastically undervalued, and is being exploited by the Chinese government to an unfair trade advantage. China has amassed an estimated $1.2 trillion in foreign currency reserves, including $420 billion in U.S. Treasury bonds.
There have been several exchanges on the currency issue in recent months. “This again highlights the ineffectiveness of the policy tinkerings that have so far failed to tackle the root cause of China’s bloated trade surplus: the significantly undervalued currency,” Hong Liang, of Goldman Sachs in Hong Kong, wrote in a research note to his clients.
The Chinese government has remained stubborn on the issue however. As Vice Premier Wu Yi said on May 25, during trade talks with Washington, “China will continue to reform its exchange rate on its own initiative, gradually.”
That reform is coming all too gradually for certain members of the United States Congress who are seeking legislation to let American companies petition for steeper anti-dumping duties against countries that keep their currencies undervalued.
Meanwhile, China’s trade surplus with the U.S. stood at $14.1 billion in June, helping it to reach $73.9 billion for the first six months of the year, according to the Customs Bureau. The U.S. also asserts that its deficit with China is bigger than the Chinese figures show.
Chinese exports climbed 27% to a record $103.27 billion, while imports showed a more modest rise of 14% to $76.4 billion. These figures were propelled by a rush of Chinese companies seeking to fill orders before July 1, when value-added tax rebates on more than 2,800 export products were reduced, or discontinued, in an attempt to appease foreign critics and trim the surplus.
Additionally, authorities have imposed new tariffs on select exports and stopped providing incentives for firms to remit the profits they earn in convertible foreign currencies. The Yuan has risen by approximately 6.9% against the dollar since it was revalued by 2.1% and liberated from a dollar peg in July 2005.
Still, appraisals that suggest the Yuan may be undervalued by as much as 40%, making China’s exports artificially cheap, which undercuts U.S. manufacturers and forces them to slash their worker ranks. And that, in turn, continues to promote criticism that China has not done enough to reduce its bloated trade surplus.