No relief for Sino-US trade tensions

Business Times - 21 Sep 2010

No relief for Sino-US trade tensions

With midterm elections approaching, the Obama administration may be torn between taking a more populist rhetoric and a harder stance on China


THE Obama administration seems to be embracing a harder hitting rhetoric on the issue of China's exchange rate policies. Or at least that was the message US Treasury Timothy Geithner was trying to convey to the US Congress during testimonies before the Senate Banking Committee and the House Ways and Means Committee on Thursday and Friday.

While emphasising that China's management of its currency did not pose a 'systemic risk to the American financial system', he agreed with the lawmakers that the yuan was 'undervalued' and the Chinese were 'moving to let it rise, but not very quickly'.

Mr Geithner told angry US lawmakers who accuse China of keeping its currency artificially low and gaining an unfair trade advantage over the US that he shared much of their concerns and that his administration was ready to get tough with Beijing over the issue.

The Obama administration was committed to 'using all tools available to ensure American firms and workers' could compete fairly with the Chinese, he insisted. And Mr Geithner also said that China was allowing piracy of US products and was putting up trade barriers that prevent American companies from operating there.

But it does not look as though Mr Geithner was very successful in persuading the lawmakers that he was getting really, really tough with the Chinese. US lawmakers, reflecting the nasty mood of economically distressed American voters and quoting studies issued by leading economists insist that China has devalued the yuan about 40 per cent, making their exports cheaper than America's and as a result, making it more difficult for US manufacturers to survive and putting downward pressure on the very high unemployment rate.

The lawmakers invited Mr Geithner to testify before them during two days of hearings on China's currency, the yuan, making it clear that unless the Obama administration took steps to punish China for its policies, they were ready to pass legislation that would force the Chinese to let their currency rise in value.

Democratic and Republican Senators introduced in March legislation that would change the criteria for designating government and currency manipulators and would force the administration to add China to the list. Similar legislation has been introduced in the House of Representatives.

US officials, including top White House economic advisor Lawrence Summers who visited Beijing recently, have been pressing the Chinese to take steps to revalue the yuan against the US dollar. But in response, the Chinese have resisted the American pressure, while allowing it to appreciate a little, by about 0.6 per cent, which made Congress angry.

But, what made both Republican and Democratic lawmakers angrier was the refusal by the Obama administration to officially designate China as a 'currency manipulator' in its annual international trade report. 'The only question is, why is the administration protecting China by refusing to designate it as a currency manipulator?' said Alabama's Richard Shelby, the ranking Republican on the Senate Banking Committee.

'You know we are right. You know the United States is put at a terrible disadvantage, and you refuse to act. What are you afraid of?' asked Chuck Schumer, a Democrat from New York. 'Are you afraid that if you cite the Chinese, they will respond by selling some of the trillions of dollars of Treasuries that they currently hold? By doing that, they'd be cutting off their nose to spite their face,' he continued, adding: 'Mr Secretary, you are vowing today to take a tougher stance against China's currency manipulation. With all due respect, I'll believe it when I see it.'

Against the backdrop of a heated election campaign leading to the crucial midterm Congressional elections, some members of the progressive wing of the Democratic Party have been urging President Barack Obama to adopt a more populist rhetoric and policies as part of an effort to convince Americans that the White House and the Democrats were willing to stand up to Wall Street and Big Business. In that context, bashing China's currency exchange policies and accusing it of 'stealing' American jobs could fit very much into that proposed campaign strategy.

The outgoing Democratic Banking Committee chairman, Christopher Dodd from Connecticut seemed to be promoting such a populist approach during the hearings last week when he compared the attempts by the Chinese to gain an unfair trade advantage to the conduct of large banks that helped bring about the financial meltdown.

'In the last financial crisis, we learned that what you don't know can hurt you, that arcane financial instruments on Wall Street can cause real pain for families and business who have never even heard of a credit default swap,' Mr Dodd said.

'That interconnection goes beyond the familiar Wall Street/Main Street divide. Something as seemingly abstract as Chinese currency policy can mean a shuttered factory in Iowa. This administration must be the one who takes a stand,' he suggested, calling on Mr Obama to adopt a firmer approach towards the Chinese.

Yet, Mr Obama and his aides are indeed 'afraid', as Mr Schumer put it, that trade sanctions against China could precipitate major Sino-American economic tensions that would retard the slow economic recovery and prefer to utilise the tools of quiet diplomacy to get the Chinese to revalue the yuan.

But most analysts doubt that the Chinese would start selling the US securities in response to American sanctions since such a move would reduce the value of the debt that they would still continue to own.

In any case, if lawmakers want to take action against the Chinese, they would need to do that before the midterm election. The expectation is that Republican leaders would prevent the passage of such legislation if as expected, the pro-business Republicans take control of the House and perhaps even the Senate after November. And that would probably suit Mr Geithner and other Obama administration economic officials.

Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.


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