Global Trends by Martin Khor
Monday 4 October 2010
Tensions rise as US bill targets China
The trend towards new protectionism accelerated
last week as the
Yet another step towards new trade protectionism
was taken in the
The bill is clearly aimed at
The bill, passed by a vote of 348-79 on 29 September, will not become law unless it is also passed by the Senate and agreed to by President Barrack Obama.
There is speculation that these two other steps
are not so likely, and that the House bill is more of a threat in order
to increase pressure on
Many American politicians blame the
With the Congressional elections on 2 November
approaching, many politicians of both parties have intensified their
China-bashing, and Obama also made the Chinese currency his top priority
topic when he met Chinese premier Wen Jeibao in
With such a mood, trade sanctions against Chinese products on currency grounds could well become a reality soon.
Currency is the latest in a series of new reasons
being prepared, to block imports. Last month the steel workers' union
Last year the House of Representatives passed a climate change related bill that included a section directing the President to impose border adjustment measures (a financial charge or levy) on selected imports from countries that do not conform to US standards of adequate action to reduce emissions.
An economist at the
While some US economists blame the Chinese currency, other economists (American and non-American) point out that the United States' economic problems stem from other more important factors, and that even a large appreciation of the yuan against the dollar would not solve the US problems.
For example, a recent South Centre paper on global
economic prospects was skeptical that dollar depreciation against the
Chinese currency would address the root cause of the
It is unlikely to produce significantly faster
growth of exports to
The paper pointed out that the
The bill directs the US Commerce Department to treat “fundamentally undervalued” currencies as an export subsidy, so that action can be taken against the countries' products.
This is counter to the Department's practice of rejecting requests to investigate China's under-valued currency as an export subsidy, on the ground that exporters are not the sole beneficiaries of the “subsidy” complained about (because for example local producers also benefit from the over-valued currency).
The bill thus removes a barrier, and passed into
law, it will strengthen complaining
To succeed, the companies would have to show they have been harmed or face the threat of serious harm by imports from the countries being blamed.
The bill defines a currency as being “fundamentally undervalued” if the government has engaged in protracted, large-scale currency intervention in a foreign exchange market during an 18-month period; if the real effective exchange rate is undervalued by at least 5 percent over the period; if the country has had significant and persistent current account surpluses during the period; and if the foreign reserves held by the government during the period exceeds the amount necessary to repay its debt obligations within the next 12 months, exceeds 20% of the country's money supply and exceeds the value of the country's imports during the previous four months.
If action is taken under this bill, a key question
would be whether it is compatible with the WTO's laws. The bill's advocates
claim it is, while
Whatever a WTO panel may decide in a future case, such an action would cause enormous damage to China-US economic relations.
Chinese Premier Wen Jiabao recently defended his country's currency policy, pointing out that the yuan had appreciated by a massive 55.2% from January 1994 to July 2010.
Saying that the yuan had seen increased flexibility
since June when
Ian Lamont, a MIT Sloan fellow, in a blog article,
has analysed why increasing the yuan's value runs counter to
He predicts that even a slight uptick in the yuan
would result in a drop in Chinese exports and put marginal factories
out of business and put their workers on the streets, while other companies
would shift their low-wage manufacturing to
And in the event of a sharp rise in the yuan, there could be extreme economic disruption, accompanied by social and political turmoil, widespread domestic instability, and an exodus of migrants.
A Xinhua agency report, which seems to corroborate Lamont's analysis, said that even the 2% yuan rise since June has caused significant difficulties to some exporters already facing increased wages and higher costs.
A Xinhua survey in the provinces of
It found that the profit margin for labor-intensive exporters' industry such as producers of textiles, garments, footwear, toys and auto parts has dropped below 5 percent this year, leaving little room for those companies to afford a stronger yuan.
Every percentage point rise of the yuan's value in real terms equalled a 0.63-percentage-point reduction in the volume of exports of machinery and electronic products, and a 1.47-percentage-point contraction in exports of textiles and garments, according to a study by the Jiangsu Provincial Academy of Social Sciences and the province's Department of Commerce.
Xu Weimin, president of Jiangsu Dongdu Textile Group Co Ltd, said the general textile industry's average profit margin was between 3 percent and 4 percent. "If the yuan rises by more than 5 percent, about two thirds of textile companies will lose,"
The obsessive conviction by US politicians that their country's economy's woes are caused by China and specifically its currency, and the serious problems on the ground in China that would be caused by an appreciation of the yuan are two factors that make the successful resolution of the US-China standoff difficult.
This explains the dangers of new and growing protectionism