The rhetoric on exchange rates is heating up again, even more so than we indicated in yesterday’s newsletter. Following Premier Wen’s statement that the Renminbi is not undervalued and that U.S. pressure for dollar “devaluation” felt like trade protection from China’s perspective, Congressional leaders have been seething and calling for action. First there was the signed letter urging that China be labeled a currency manipulator at the next report on U.S. trade partners which is due April 15 from the Treasury department. Then a group of senators launched some new legislation that grafts together past legislation and focuses on whether or not currencies are misaligned, and plans a schedule of remedies if they are deemed so. All in all, politicians in both countries are trying to gain domestic support by attacking each other’s policies. This, as the economist argued last week, could actually defer the adjustment both sides know is necessary.
It remains uncertain if legislation will pass, but clearly the political pressure is on, adding to the list of grievances and unease that have surrounded U.S.-China relations of late. What is striking though is that while the rhetoric has been so fever pitched, actions have as of yet been few. Politicians from both sides have started to draw lines in the sand from which it may be difficult to withdraw.
We almost need a time out. Given the relative stalling of the U.S. and EU economies and a plethora of long-term challenges, de-pegging is not only necessary for international economic adjustment but for dealing with China’s own imbalances and loose monetary conditions. However, the politics make this difficult. Could this be a case of bad cop, bad cop?
James Pethoukis of Breaking Views argues that receiving a currency manipulator tag from the Treasury’s April report might actually defuse, not boost, tensions between the U.S. and China as it would implicitly mandate a cooling off period between the countries given that the next step is discussion – up to a year of it. That is, a determined White House and Treasury might be preferable to congressional remedies.
After all, the label would have been a long-time coming and the most sedate negotiation process might be preferred to congressional fervor, which could culminate in a range of hefty import taxes, referral to the IMF and trade complaints to the WTO. The IMF’s past attempts to realign misaligned currencies through its multilateral exchange rate mechanism or even to label currencies as misaligned, fell relatively flat after it was launched in 2007, with China preferring to forego its chats with the IMF than to have the RMB labeled as a misaligned currency. For more on the definitional issues between manipulation and misalignment, check out our critical issue onDefining Currency Manipulation.
Michael Pettis as always has a great assessment of these issues, particularly the range of impacts from an RMB revaluation and warning of the risks that could affect global growth if the U.S. and China keep trying to push the cost of adjustment off to the other. As he notes, tariffs on Chinese imports might just shift imports to other Asian economies.
As a result, as Arvind Subramanian argues today in the FT, a multilateral solution might actually be necessary even if difficult to achieve. Doing so, and involving the WTO, could avoid bilateral finger pointing, but getting convening power could be tough. Past attempts at multilateral settlements, say through the IMF’s exchange rate surveillance, have come up short.
While the tension has picked up between the U.S. and China, ultimately, China’s pegging restrains global adjustment. China’s RMB has weakened significantly on a real effective basis since mid 2009. But, now that the euro has started climbing again, European countries are also suffering- not to mention any of the non-commodity exports from countries like Canada. Undoubtedly, some of these issues and questions about China’s resource acquisitions and strategic moves in the pacific will play a part of discussions that Presidents Obama and Rudd will have next week in their meeting.
PS- for those interested in weekend reading on china, it is worth checking out some of the background papers to be presented at the China Development forum this weekend. There are some interesting summaries from government research houses on fiscal policy, investment, trade and of course… imbalances.
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