Reposted from The New York Times
Annie Lowrey | October 22, 2012 | NY Times
WASHINGTON — At the presidential debate on Monday night, Mitt Romney, the Republicans’ nominee, repeated his promise to brand China a currency manipulator and to rebalance the trade relationship between the two countries.
But formally citing Beijing as a currency manipulator may backfire, economic and foreign-policy experts have said. In the worst case, it could set off a trade war, leading to falling American exports to China and more expensive Chinese imports.
“The economic credibility of that action would be pretty thin,” said Arvind Subramanian of the Peterson Institute of International Economics in Washington. “Moreover, it would be blatantly provocative at a time when the new leadership was getting in place in China, and the new administration as well.”
Asked about the possibility of a trade war at his debate with President Obama, Mr. Romney said one was already under way. “It’s a silent one, and they’re winning,” he said. “We can’t just surrender and lose jobs.”
American officials largely, if tacitly, agree that China manipulates the value of its currency to aid its economy.
In its most recent installment of a twice-yearly report to Congress on the exchange and economic policies of the United States’ major trading partners, the Treasury Department said that China has “resisted very strong market pressures” for currency appreciation and that its “real effective exchange rate exhibited persistent and substantial undervaluation.”
But since 1994, the Clinton, Bush and Obama administrations have declined to formally designate China as a currency manipulator for a number of economic and strategic reasons.
For the Obama administration, one reason is that China has made significant progress in allowing its currency to appreciate against the dollar of late — making Chinese imports relatively more expensive and American exports relatively more competitive. A dollar currently buys about 6.25 renminbi, down from about 6.8 when Mr. Obama took office.
Administration officials have urged China to do more in frequent behind-the-scenes negotiations: to allow further currency appreciation, to protect American companies’ intellectual property, to reform its financial system, to even the playing field for companies that might want to invest in China and many other issues.
The administration has also filed new trade cases against China at the World Trade Organization, and set up a trade task force to ensure all countries are playing by the rules.
They have also praised the country for the progress it has made. “I think the cumulative effect of what China has done on the exchange rate side is, and the external side, is very significant and very promising,” Timothy F. Geithner, the Treasury secretary, said this year.
Congress has pushed a more aggressive approach, repeatedly putting forward bipartisan bills to punish countries, like China, that manipulate their currencies.
“The jig is up, it’s time to stop gaming the system or face severe consequences,” Senator Charles E. Schumer, Democrat of New York, said in a statement last year, co-sponsoring a bill that focused on Beijing. “China’s history of half-truths and broken promises on currency makes passing this legislation an economic imperative.”
Second, economic and foreign-policy experts argue that taking more aggressive actions against China might not result in a stronger American economy — instead pitting the two countries against each other.
“In the worst case, a Romney decision to go to the brink with Beijing on the value of its currency would result in a mutually damaging trade war that slowed economic growth and increased unemployment in both countries and caused inflation and higher interest rates in the United States,” Richard C. Bush III of the Brookings Institution wrote in a recent analysis.
Labeling China a currency manipulator would not automatically put in place tariffs, sanctions or other trade actions. But the measure would signal the United States’ intention to take such measures — and China might take countervailing ones in turn. Beijing might stop granting contracts to American companies, like General Electric or Boeing, for instance. It might issue levies or tariffs itself.
Antagonizing China would threaten the trade relationship with one of the United States’ fastest-growing export markets, economists note. Chinese investment in the United States has also been increasing.
“Today China is a minor U.S. employer compared to longtime foreign investors such as Germany or Japan, but the potential for Chinese investment-led job creation is tremendous,” concluded a report released last month by the Rhodium Group, a research firm in New York. “If investment from China remains on track, Chinese firms will employ 200,000 to 400,000 Americans by 2020,” up from about 27,000 today.
More broadly, if the United States leveled sanctions or tariffs against China, other low-wage countries — in many cases, countries that also engage in currency manipulation — might fill its void, economists said.
“Smaller U.S. trade deficits with China, offset by larger bilateral deficits with other countries, cannot be expected to provide material job growth,” concluded recent research by the Federal Reserve Bank of St. Louis.
On top of any economic concerns come pressing foreign-policy concerns. Designating China as a currency manipulator might cast a shadow on relations with the Asian power.
For months, Chinese officials have quietly telegraphed their displeasure at the idea that a new administration might brand them as a manipulator.
At the International Monetary Fund-World Bank meetings in Tokyo this month, Yi Gang, deputy governor of the People’s Bank of China, made a point of noting the country’s progress — the country’s current account surplus has fallen to 2.1 percent of economic output from 10.1 percent in 2007, he said, for instance.
“This has been primarily driven by structural factors, including the substantial appreciation of the real exchange rate,” Mr. Yi said. “In the face of the uncertain global environment, the Chinese government will continue to take effective measures to maintain growth stability and accelerate the restructuring of the economy.”