The U.S. House of Representatives today (Wednesday) will vote on legislation that would let the U.S. government take punitive actions against countries that undervalue their currencies.
The bill isn't likely to have any tangible impact on U.S. policy, but it's yet another manifestation of the growing friction between the world's two greatest economic powers.
The Currency Reform for Fair Trade Act (HR 2378) is the apparent result of increasingly harsh rhetoric towards China's currency policy, which U.S. lawmakers say keeps the yuan undervalued. It is a relatively toothless measure that will likely have no effect on U.S. policy, but instead serve as a rallying cry for Congressional lawmakers looking to win votes ahead of November's midterm elections, and perhaps, U.S. officials heading to a Group of 20 (G20) summit the very same month.
Language that would have required the Obama administration to impose duties on imports from currency-manipulating countries was taken out of the bill on Friday, before it left the House Ways and Means Committee for a vote. That left only the vague threat of repercussion for countries with undervalued currencies, which if enacted, would violate World Trade Organization (WTO) laws.
It's unlikely that even the watered down bill would pass the Senate, which is less cohesive in its criticism of China's trade policies, or a potential veto by President Obama.
But if it did manage to pass Congress, the bill could still have disastrous implications.
The bill "would create a very damaging thing to the world economy and the stability of Asia," Nobel-Prize winning economist Robert Mundell told Bloomberg Television. "This would have a wounding effect on the stability of international relations. There's never been any precedent in economic history where a country through any legal system was forced to appreciate its currency relative to another country."
Indeed, China has repeatedly asserted that decisions on the yuan will be based on its own economic objectives, not foreign pressure.
"We'll make a decision based on our own economic development levels and the world economic situation," said Chen Jian, China's vice commerce minister. "If it takes the yuan to appreciate for our economy to develop, we will do it even though it would have a negative impact. But it is redundant for the U.S. Congress to pass the proposal."
Additionally, there's little to suggest that an appreciation in the yuan's value would do anything to help stabilize the U.S. economy.
"It's not going to have much of a dent in the U.S. deficit," said Mundell, who won the Nobel Prize in 1999 for research that helped lay the foundation for Europe's single currency. "America has had a huge deficit since the 1980s. None of that is going to change if China changes its exchange rate."
The U.S. trade deficit declined 14% to $42.8 billion in July from $49.8 billion in June, the Commerce Department said earlier this month. The deficit with China fell to $25.9 billion from $26.2 billion in June. The U.S. trade gap with China was $119.5 billion in the first six months of the year.
There's little doubt that the undervalued yuan has contributed to the deficit by making Chinese goods cheaper. But high unemployment, weak domestic demand, and a soaring national debt won't be solved through a political melee with China. In fact, there's a far greater chance that a showdown with China would hurt ailing U.S. businesses more than it would help them.
"This step would make it harder for us to export to China, not easier," Timothy Stratford, a partner in Beijing at Covington & Burling LLP and a former U.S. trade official, told Bloomberg.
Robert Roche, the chairman of the American Chamber of Commerce in Shanghai, says U.S. lawmakers and businesses would be better served to ask why Germany, Japan and other nations are exporting more goods to China, while the United States is exporting less to the Asian juggernaut.
The United States has seen its share of China's imports drop from 10.7% in 2001 to 7.18% in 2008. It exported just $69.5 billion worth of goods to China last year. Meanwhile, Japanese exports to China totaled $109.7 billion, and Germany's exports to the Red Dragon increased by 7% to $49.4 billion. Total European Union exports to China reached $111 billion in 2009.
So it's no wonder the United States is beginning to look increasingly isolated in its push for Chinese currency reform.
Speaking to Congress earlier this month U.S. Treasury Secretary Timothy Geithner said he would use the upcoming G20 summit in Seoul, South Korea as a forum for debate over the yuan, but representatives from other countries have been reluctant to follow his lead.
"The U.S. is more determined than the rest of the G20 to get something out of China on the yuan," a Eurozone monetary official speaking on condition of anonymity told Reuters. "It's largely a bilateral matter with the rest looking on as spectators, either because they don't count enough or because they aren't very interested."
Meanwhile, China has demonstrated its growing global influence by finding support among other emerging markets, like Russia and Brazil.
"I believe that this idea of putting pressure on a country is not the right way for finding solutions," Brazilian Foreign Minister Celso Amorim told Reuters last week.
Brazil, he said, enjoyed good coordination with China and "we can't forget that China is currently our main customer."
Said Indonesian Foreign Minister Marty Natalegawa: "The rise of China, the increasing prominence of China, is a fact of life. It is something that we must all embrace, and celebrate as a matter of fact, because Indonesia is benefiting as well with China's increasing economic prominence."
Indeed, China's rise as an economic counterweight to the United States only really seems to be a problem for the United States. Here, the belief that China's growing economic and political clout is something to be embraced has found much less traction.
In an op-ed piece for the Washington Post, financial author and columnist Robert J. Samuelson pointed out that China has never genuinely accepted the basic rules governing the world economy, but rather followed the rules that suit its interests and rejects, modifies, or ignores the ones that don't.
Of course, confronting China's self-serving economic policies with trade protectionism at a time of such economic instability could result in economic catastrophe. But Samuelson argues that it's a tactic we must nonetheless pursue.
"The collision is between two concepts of the world order," he says. "As the old order's main architect and guardian, the United States faces a dreadful choice: resist Chinese ambitions and risk a trade war in which everyone loses; or do nothing and let China remake the trading system. The first would be dangerous; the second, potentially disastrous."
News and Related Story Links:
- Money Morning:
What's In a Name: Can the U.S. Afford to Call China a Currency Manipulator?
U.S. set to be a posse of one on China yuan at G20
- Washington Post:
The makings of a trade war with China
China May Retaliate for Currency Measure, U.S. Businesses Say
Mundell Says U.S. Action on Yuan Rate Would Be a 'Disaster'