Twice a year, by law, Treasury must issue a report identifying nations that “manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.” The law’s intent is clear: the report should be a factual determination, not a policy statement. In practice, however, Treasury has been both unwilling to take action on the renminbi and unwilling to do what the law requires, namely explain to Congress why it isn’t taking action. Instead, it has spent the past six or seven years pretending not to see the obvious.
Will the next report, due April 15, continue this tradition?
Should this be a unilateral or bilateral discussion?
If you think bilateral talks can work how do you allow China to "save face" against the big bully?
Are the IMF and/or WTO toothless in this argument?
Is Google just the first shot across the bow?
The rest of Paul Krugman's commentary:
Spoiler :
Tensions are rising over Chinese economic policy, and rightly so: China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done.
To give you a sense of the problem: Widespread complaints that China was manipulating its currency — selling renminbi and buying foreign currencies, so as to keep the renminbi weak and China’s exports artificially competitive — began around 2003. At that point China was adding about $10 billion a month to its reserves, and in 2003 it ran an overall surplus on its current account — a broad measure of the trade balance — of $46 billion.
Today, China is adding more than $30 billion a month to its $2.4 trillion hoard of reserves. The International Monetary Fund expects China to have a 2010 current surplus of more than $450 billion — 10 times the 2003 figure. This is the most distortionary exchange rate policy any major nation has ever followed.
And it’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.
So how should we respond? First of all, the U.S. Treasury Department must stop fudging and obfuscating.
Twice a year, by law, Treasury must issue a report identifying nations that “manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.” The law’s intent is clear: the report should be a factual determination, not a policy statement. In practice, however, Treasury has been both unwilling to take action on the renminbi and unwilling to do what the law requires, namely explain to Congress why it isn’t taking action. Instead, it has spent the past six or seven years pretending not to see the obvious.
Will the next report, due April 15, continue this tradition? Stay tuned.
If Treasury does find Chinese currency manipulation, then what? Here, we have to get past a common misunderstanding: the view that the Chinese have us over a barrel, because we don’t dare provoke China into dumping its dollar assets.
What you have to ask is, What would happen if China tried to sell a large share of its U.S. assets? Would interest rates soar? Short-term U.S. interest rates wouldn’t change: they’re being kept near zero by the Fed, which won’t raise rates until the unemployment rate comes down. Long-term rates might rise slightly, but they’re mainly determined by market expectations of future short-term rates. Also, the Fed could offset any interest-rate impact of a Chinese pullback by expanding its own purchases of long-term bonds.
It’s true that if China dumped its U.S. assets the value of the dollar would fall against other major currencies, such as the euro. But that would be a good thing for the United States, since it would make our goods more competitive and reduce our trade deficit. On the other hand, it would be a bad thing for China, which would suffer large losses on its dollar holdings. In short, right now America has China over a barrel, not the other way around.
So we have no reason to fear China. But what should we do?
Some still argue that we must reason gently with China, not confront it. But we’ve been reasoning with China for years, as its surplus ballooned, and gotten nowhere: on Sunday Wen Jiabao, the Chinese prime minister, declared — absurdly — that his nation’s currency is not undervalued. (The Peterson Institute for International Economics estimates that the renminbi is undervalued by between 20 and 40 percent.) And Mr. Wen accused other nations of doing what China actually does, seeking to weaken their currencies “just for the purposes of increasing their own exports.”
But if sweet reason won’t work, what’s the alternative? In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.
I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.
To give you a sense of the problem: Widespread complaints that China was manipulating its currency — selling renminbi and buying foreign currencies, so as to keep the renminbi weak and China’s exports artificially competitive — began around 2003. At that point China was adding about $10 billion a month to its reserves, and in 2003 it ran an overall surplus on its current account — a broad measure of the trade balance — of $46 billion.
Today, China is adding more than $30 billion a month to its $2.4 trillion hoard of reserves. The International Monetary Fund expects China to have a 2010 current surplus of more than $450 billion — 10 times the 2003 figure. This is the most distortionary exchange rate policy any major nation has ever followed.
And it’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.
So how should we respond? First of all, the U.S. Treasury Department must stop fudging and obfuscating.
Twice a year, by law, Treasury must issue a report identifying nations that “manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.” The law’s intent is clear: the report should be a factual determination, not a policy statement. In practice, however, Treasury has been both unwilling to take action on the renminbi and unwilling to do what the law requires, namely explain to Congress why it isn’t taking action. Instead, it has spent the past six or seven years pretending not to see the obvious.
Will the next report, due April 15, continue this tradition? Stay tuned.
If Treasury does find Chinese currency manipulation, then what? Here, we have to get past a common misunderstanding: the view that the Chinese have us over a barrel, because we don’t dare provoke China into dumping its dollar assets.
What you have to ask is, What would happen if China tried to sell a large share of its U.S. assets? Would interest rates soar? Short-term U.S. interest rates wouldn’t change: they’re being kept near zero by the Fed, which won’t raise rates until the unemployment rate comes down. Long-term rates might rise slightly, but they’re mainly determined by market expectations of future short-term rates. Also, the Fed could offset any interest-rate impact of a Chinese pullback by expanding its own purchases of long-term bonds.
It’s true that if China dumped its U.S. assets the value of the dollar would fall against other major currencies, such as the euro. But that would be a good thing for the United States, since it would make our goods more competitive and reduce our trade deficit. On the other hand, it would be a bad thing for China, which would suffer large losses on its dollar holdings. In short, right now America has China over a barrel, not the other way around.
So we have no reason to fear China. But what should we do?
Some still argue that we must reason gently with China, not confront it. But we’ve been reasoning with China for years, as its surplus ballooned, and gotten nowhere: on Sunday Wen Jiabao, the Chinese prime minister, declared — absurdly — that his nation’s currency is not undervalued. (The Peterson Institute for International Economics estimates that the renminbi is undervalued by between 20 and 40 percent.) And Mr. Wen accused other nations of doing what China actually does, seeking to weaken their currencies “just for the purposes of increasing their own exports.”
But if sweet reason won’t work, what’s the alternative? In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.
I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.
http://www.nytimes.com/2010/03/15/opinion/15krugman.html
Also, from the Peterson Institute of International Economics
A little snippet from their testimony in front of the House Ways and Means Committee
The competitive undervaluation of the Chinese renminbi and several neighboring Asian countries has a very substantial impact on the United States. As noted, an appreciation of 25 to 40 percent is needed to cut China's global surplus even to 3 to 4 percent of its GDP. This realignment would produce a reduction of $100 billion to $150 billion in the annual US current account deficit.5
Every $1 billion of exports supports about 6,000 to 8,000 (mainly high-paying manufacturing) jobs in the US economy. Hence such a trade correction would generate an additional 600,000 to 1,200,000 US jobs. Correction of the Chinese/Asian currency misalignment is by far the most important component of the President's new National Export Initiative. As its budget cost is zero, it is also by far the most cost-effective step that can be taken to reduce the unemployment rate in the United States.
Correcting the Chinese Exchange Rate: An Action Plan
Spoiler :
by C. Fred Bergsten, Peterson Institute for International Economics
Testimony before the Committee on Ways and Means, US House of Representatives
March 24, 2010
The Problem
The Chinese renminbi is undervalued by about 25 percent on a trade-weighted average basis and by about 40 percent against the dollar.1 The Chinese authorities buy about $1 billion daily in the exchange markets to keep their currency from rising and thus to maintain an artificially strong competitive position. Several neighboring Asian countries of considerable economic significance—Hong Kong, Malaysia, Singapore and Taiwan—maintain currency undervaluations of roughly the same magnitude in order to avoid losing competitive position to China.
This competitive undervaluation of the renminbi is a blatant form of protectionism. It subsidizes all Chinese exports by the amount of the misalignment, about 25–40 percent. It equates to a tariff of like magnitude on all Chinese imports, sharply discouraging purchases from other countries. It would thus be incorrect to characterize as "protectionist" a policy response to the Chinese actions by the United States or other countries; such actions should more properly be viewed as anti-protectionist.
Largely as a result of this competitive undervaluation, China's global current account surplus soared to almost $400 billion and exceeded 11 percent of its GDP in 2007, an unprecedented imbalance for the world's largest exporting country and second largest economy. China's global surplus declined sharply during the Great Recession, as its foreign markets weakened, but it remained above 5 percent of China's GDP (almost $275 billion) even in 2009. The International Monetary Fund estimates that the surplus is rising again and, at current exchange rates, will exceed the global deficit of the United States by 2014.2 In a world where high unemployment and below-par growth are likely to remain widespread for some time, including in the United States, China is thus exporting very large doses of unemployment to the rest of the world—including the United States but also to Europe and to many emerging market economies including Brazil, India, Mexico and South Africa.3
China's exchange rate policy violates all relevant international norms. Article IV, Section 1 of the Articles of Agreement of the International Monetary Fund (IMF) commits member countries to "avoid manipulating exchange rates or the international monetary system in order to prevent effective balance-of-payment adjustment or to gain unfair competitive advantage over other member countries." Moreover, the principles and procedures for implementing the Fund's obligation (in Article IV, Section 3) "to exercise firm surveillance over the exchange rate policies of members" call for discussion with a country that practices "protracted large-scale intervention in one direction in exchange markets"—a succinct description of China's currency policy over the past seven years. Article XV(4) of the General Agreement on Tariffs and Trade (GATT), which is now an integral part of the World Trade Organization (WTO), similarly indicates that "Contracting parties shall not, by exchange action, frustrate the intent of the provisions of this Agreement."
Huge current account imbalances, including the US deficit and the Chinese surplus, of course reflect a number of economic factors (national saving and investment rates, the underlying competitiveness of firms and workers, etc.) other than exchange rates. Successful international adjustment of course requires corrective action by the United States, particularly with respect to its budget deficit and low national saving rate, and other countries as well as by China. But it is impossible for deficit countries to reduce their imbalances unless surplus countries reduce theirs. And restoration of equilibrium exchanges rates is an essential element of an effective global "rebalancing strategy" as agreed by the G-20 over the past year.4
The competitive undervaluation of the Chinese renminbi and several neighboring Asian countries has a very substantial impact on the United States. As noted, an appreciation of 25 to 40 percent is needed to cut China's global surplus even to 3 to 4 percent of its GDP. This realignment would produce a reduction of $100 billion to $150 billion in the annual US current account deficit.5
Every $1 billion of exports supports about 6,000 to 8,000 (mainly high-paying manufacturing) jobs in the US economy. Hence such a trade correction would generate an additional 600,000 to 1,200,000 US jobs. Correction of the Chinese/Asian currency misalignment is by far the most important component of the President's new National Export Initiative. As its budget cost is zero, it is also by far the most cost-effective step that can be taken to reduce the unemployment rate in the United States.
China did let its exchange rate appreciate gradually from July 2005 until the middle of 2008 (and rode the dollar up for a while after it re-pegged in the fall of 2008). During that time, the maximum increase in its trade-weighted and dollar values was 20 to 25 percent (which represented good progress although it still left an undervaluation of roughly a like amount at that time). It has since depreciated again significantly, riding the dollar down, so that its net rise over the past five years is only about 15 percent. Moreover, despite China's declared adoption of a "market-oriented" exchange rate policy in 2005, its intervention to block any further strengthening of the renminbi against the dollar is about twice as great today ($30 billion to $40 billion per month) as it was then ($15 billion to $20 billion per month); on that metric, China's currency policy is now about half as market-oriented as it was prior to adoption of the "new policy."
The present time is highly opportune for China to begin the process of restoring an equilibrium exchange rate. The Chinese economy is booming, indeed leading the world recovery from the Great Recession (and China deserves great credit for its effective crisis response strategies). Inflation is now rising and the Chinese authorities have begun to take monetary and other measures to avoid renewed overheating; currency appreciation would be an effective and powerful tool to this end by lowering the price of imports and dampening demand for exports.6 Appreciation of the renminbi at this time would in fact serve both the internal and external policy objectives of the Chinese authorities, as part of their long-stated intention and international commitment to rebalance the country's economic growth away from exports and toward domestic (especially consumer) demand.
An Action Plan
The case for a substantial increase in the value of the renminbi is thus clear and overwhelming. Some observers believe that China is in fact preparing to shortly renew the gradual appreciation of mid-2005 to mid-2008 (5 to 7 percent per year) or even to announce a modest (5 to 10 percent) one-shot revaluation (with or without resuming the upward crawl in addition). On the other hand, Premier Wen Jiabao recently denied that the renminbi was undervalued at all and accused other countries (!) of seeking to expand exports and create jobs by unfairly depreciating their exchange rates.7
Unfortunately, the two preferred strategies for promoting Chinese action—sweet reason and implementation of the multilateral rules, especially in the IMF—have to date had limited success. Both efforts should continue, however, and it is particularly important that any stepped-up initiatives toward China be multilateral in nature. 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 the Chinese frequently claim to champion. Moreover, the multilateral efforts have been half-hearted at best and it is especially important for the United States to exhaust that route before contemplating more severe unilateral steps.
Much of the blame for this failure of policy to date falls on the US Government, which has been unwilling to label China the currency manipulator that it has been so clearly for a number of years. The unwillingness of the United States to implement the plain language of the Trade Act of 1988 has substantially undermined its credibility in seeking multilateral action against China in the IMF, the WTO, the G-20 or anywhere else. A sensible and effective strategy must begin by reversing that feckless position.
Hence I would recommend that the Administration adopt a new three-part strategy to promote early and substantial appreciation of the exchange rate of the renminbi:
- 1. Label China as a "currency manipulator" in its next foreign exchange report to the Congress on April 15 and, as required by law, then enter into negotiations with China to resolve the currency problem.8
- 2. Hopefully with the support of the European countries, and as many emerging market and developing economies as possible, seek a decision by the IMF (by a 51 percent majority of the weighted votes of member countries) to launch a "special" or "ad hoc" consultation to pursue Chinese agreement to remedy the situation promptly. If the consultation fails to produce results, the United States should ask the Executive Board to decide (by a 70 percent majority of the weighted votes) to publish a report criticizing China's exchange rate policy.9
- 3. Hopefully with a similarly broad coalition, the United States should exercise its right to ask the WTO to constitute a dispute settlement panel to determine whether China has violated its obligations under Article XV ("frustration of the intent of the agreement by exchange action") of the WTO charter and to recommend remedial action that other member countries could take in response. The WTO under its rules would ask the IMF whether the renminbi is undervalued, another reason why it is essential to engage the IMF centrally in the new initiative from the outset. 10
A three-pronged initiative of this type would focus global attention on the China misalignment and its unwillingness to initiate corrective action to date. The effort would have maximum impact if it could be undertaken by the United States in concert with countries that constituted a substantial share of the world economy, including emerging market and developing economies as well as the Europeans and other high-income nations. Asian countries, such as Japan and India, will be skittish in confronting China in this way but are hit hard by the Chinese undervaluation and should be increasingly willing to join the coalition as its size grows.
The objective of the exercise is of course to persuade, or "name and shame," China into corrective action. Unfortunately, the IMF has no sanctions that it can use against recalcitrant surplus countries.11 Hence the WTO, which can authorize trade sanctions against violations of its charter, needs to be brought into the picture from the outset.12 Unfortunately, there are technical and legal problems with the WTO rules too (like the IMF rules) so they may also need to be amended for future purposes.13
The United States could of course intensify its initiative by taking unilateral trade actions against China. For example, the Administration could decide that the undervaluation of the renminbi constitutes an export subsidy in determining whether to apply countervailing duties against imports from China. Congress could amend the current countervailing duty legislation to make clear that such a determination is legal. In either case, China could appeal to the WTO and the United States would have to defend its actions under the Subsidy Code.14
Countervailing duties and other product-specific or sector-specific steps, such as the Section 421 case on tires last year or traditional Section 201 safeguard cases, are basically undesirable, however, because they distort and disguise the across-the-board nature of the Chinese currency misalignment.15 These measures are intended to address problems that are unique to a particular product or sector rather than affecting trade and the economy as a whole. As noted above, China's competitive undervaluation represents a subsidy to all exports and a tariff on all imports. Hence it requires a comprehensive response via the exchange rate itself since there is no good alternative. A US effort that encompasses unilateral, IMF and WTO dimensions to that end is likely to be the most effective strategy we can undertake at this time.
http://www.iie.com/publications/papers/paper.cfm?ResearchID=1523
