Global Trends by Martin Khor
Monday 10 October 2011
bashing won’t solve US problems
The United States Senate is scheduled to vote this
week on a “currency bill” to allow actions against China’s imports. But bashing China may unleash a trade war without solving America’s problems
currency and trade performance a threat to the United States? Or are American politicians
as a scapegoat for the country’s economic problems?
“China bashing” has
been on the rise in the US.
It is widely thought that politicians of both parties are doing it to
gain popularity in view of the coming elections.
For some years, Congress members have threatened to take action on Chinese
imports to retaliate against what they see as China’s manipulation of its currency
The politicians say that the Chinese yuan is lower than what it should
be if there were no government intervention.
They charge that the undervalued currency enables China
to have a large trade surplus vis-ŕ-vis the US, and that this has caused the loss
of American jobs.
These charges are refuted by the Chinese government, which argues that
the US trade deficit
is due to domestic factors and not Chinese policy. It also points to
the 7% appreciation of the yuan versus the dollar in recent months.
This issue has been a central economic policy issue between the two
major countries. It could escalate into a major battle on the ground.
The US Senate is scheduled to vote this Tuesday on a bill aimed at enabling
import tariffs to be placed on Chinese imports as a retaliation against
the alleged currency manipulation.
In a first step, the Senate on 3 Oct voted 79-19 to allow a week-long
debate on the Currency Exchange Rate Oversight Reform Act of 2011.
The bill mandates a process for imposing tariffs on imports of a country
with allegedly “misaligned currencies”.
is not named, it is obviously the target. The bill would in effect require
the US Treasury Department to determine if China is manipulating the yuan. If
it finds this to be the case, extra tariffs could be placed on some
imported Chinese goods.
The bill is expected to pass in the Senate. But a similar bill has to
also go through the House of Representatives, and be approved by President
Barrack Obama, before the trade measures can be taken.
These two steps are far from assured. Although it seems a majority of
the House are in favour, the Speaker John Boehner said last week it
is dangerous to be moving legislation through the Congress “forcing
someone to deal with the value of their currency….While I've got concerns
about how the Chinese have dealt with their currency, I'm not sure this
is the way to fix it.
Obama last Thursday accused China
of “gaming” the trade system to the disadvantage of other countries
especially the US.
But he also expressed concern that the Senate bill “may not actually
work… as it may be only “symbolic” and it is probably not going to
be upheld by the World Trade Organization (WTO).
Nevertheless, the probability of the passage of the Senate bill has
heightened US-China tensions and raised the potential of a serious trade
As could be expected, Chinese government agencies and think-tanks are
reacting strongly to what they perceive as a protectionist move.
The People's Bank of China (its central bank) said the Senate bill will
not help resolve the United
States’ domestic issues such as the
trade deficit, low level of savings and high unemployment, but could
potentially affect the economy and market confidence. It added: "The
passage of the bill may seriously affect China's
currency reforms, potentially leading to a trade war between the two
"It is easy for the US
to make China
a scapegoat of its domestic problems at a time when its economy remains
weak with a high unemployment rate and the next general election only
13 months away," said Xu Mingqi, deputy director of the Institute
of the World Economy at the Shanghai Academy of Social Sciences.
In the event the Senate bill makes its way into actual law, a dispute
case will most likely be taken against the US at the WTO.
The WTO rules do not allow countries to impose
punitive duties on the basis that a certain country’s currency is undervalued.
That this is so is appropriate. Valuing currencies to see if they are
“manipulated” is very complex and difficult.
For example, the US
has also been accused of pushing its currency down through its controversial
“quantitative easing” policy (central-bank pumping of funds into the
banking system). And is Switzerland “manipulating” its currency
by announcing it will not tolerate further appreciation of the franc?
Allowing the currency issue to be a subject of possible unfair practice
open to trade sanctions would open the road to many other issues being
similarly recognized, such as a country’s tax rates, interest rates,
labour and environmental standards. There will be no end to having reasons
for new trade protectionism.
law based on the Senate bill will probably be found to be inconsistent
with US obligations in the WTO. But by the time the WTO dispute system
panel makes a final ruling (this may take years), some damage may already
be done should the US act
against Chinese imports in the meanwhile.
China may not take
the US actions lying
down, and could retaliatory action on US goods. Thus a trade war may
Interestingly, although some well-known American economists like Paul
Krugman and Fred Bergsten advocate US action against Chinese imports,
some business associations and important newspapers like the New York
Times, Wall Street Journal and Financial Times have come out strongly
against the Senate bill for its protectionism and trade-war potential.
The high-pitched attack on China
because of its large trade surplus with the US is misplaced. Little of the gross
surplus actually accrues to China.
A 2010 paper by the South Centre shows that only a small part of China’s exports to the US is actually retained as income in China.
For example, in 2005, China’s
gross trade surplus with the US
was $172 billion but in value added terms (what is earned by the respective
countries after deducting the import content of their exports) it was
only $40 billion.
Further, a large part of the Chinese trade surplus in value-added terms
was earned by foreign firms in China
and thus does not belong to China.
As a result, income left in China was no more than 30 per cent of total value
of exports to the US.
Therefore the criticism that China
enjoys extraordinarily high trade surpluses with the US is misplaced.
Also, even if US
trade measures reduces Chinese imports into the US,
this does not mean that the US
import bill will be reduced. Goods from other developing countries
such as Vietnam or
may just replace the Chinese goods.
Therefore, US actions
based on the Senate bill would hardly help the US get rid of its trade deficit.
It is best that the US take domestic actions to address its domestic
economic problems, rather than make a scapegoat of other countries and
potentially unleash new trade wars.
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