U.S. Applies Pressure In China Currency Feud

Is calling China a currency manipulator and imposing tariffs the right approach?

As Chinese Premier Wen Jiabao rejected American pressure outright, Japan has taken advantage of the tension to seek its own advantage, intervening in currency markets for the first time in years. Even Brazil has threatened its own, self-interested currency interventions. These are dangerous trends, threatening adverse economic and market effects-significant risks that recommend a less heavy-handed, bullying approach.

Of course, the United States and China have feuded over trade for years, particularly about the foreign exchange value of China's yuan. As early as 1993 the Clinton White House contemplated how China's cheap currency gave its exports unfair pricing advantages on global markets. At that time, the administration began to pressure Beijing for an upward yuan revaluation. The notion was so thoroughly rejected that in January of the following year, Beijing devalued the yuan by almost 50% in one sudden, orchestrated move-an action, incidentally, that contributed in no small way to the Asian financial and economic crisis of 1997 and 1998. After Clinton, the Bush administration fared better in getting China to yield. Even so, in 2005, after the European Union (EU) made the same complaints and it looked as though Congress had run out of patience, Beijing did allow some yuan appreciation. The appreciation, however, was more cosmetic than substantive.

The intensity of American pressure has ramped up in this latest round. By labeling China a currency manipulator, Congress will have made it easier to impose special tariffs on Chinese goods that would offset the presumably artificial advantages of Beijing's currency management. It speaks to Washington's unity of purpose that Treasury Secretary Geithner also has called for some mechanism to force countries like China to revalue their currencies and "abandon export-oriented policies."

From the European Union, Jean-Claude Juncker, speaking for a group of finance ministers, has echoed American complaints.

Rather than appease those concerns, China's Premier Wen has warned (in his words) of the "chaos" that would ensue from a yuan revaluation. Even his seemingly conciliatory gesture of buying Greek government bonds effectively rejects the currency demands, since the global flow of yuan to make such purchases would only depress its value next to euros and dollars. Even if Premier Wen wanted to accommodate America and the EU, China's economic realities would tie his hands.

The country simply cannot abandon export support-at least in the near term. That's because growth in the area is the only way it can create jobs for the approximately 1 million people a month who leave farms in China's hinterland in search of a better life in China's cities. Beijing knows that a failure in exports would halt the jobs growth and risk violent social unrest. Chinese authorities got a sobering taste of the prospect during the recent global recession, when a decline in exports impelled layoffs that led quickly to rioting across the country. From Beijing's perspective, and with some justice, the risk of abandoning the cheap yuan policy is simply too great, whatever threats the Americans and Europeans level.

In the meantime, it is not apparent that such tariffs would do much to help the American economic situation. Certainly, tariffs would hurt the average American consumer by raising the price of Chinese imports, as well as living costs across the country. Moreover, China has such a huge cost advantage over its American competitors, that even in the face of high tariffs it might well sustain its export flow to America. Even if tariffs could block Chinese goods, they would hardly protect American industry and jobs from foreign competition. Vietnam, Indonesia, and other low-cost producers would just step in where China was excluded.

Rather than insist on the impossible and raise the cost-of-living in the bargain, the United States might do better to seek what common ground it has with China. Here, there is promise in a longer-term perspective. For all their immediate differences, Washington and Beijing both want a reorientation in China, from export-led growth to a more broad-based, domestic, consumer-oriented economy. The Americans see such an adjustment as a way to increase the sales in China and balance trade between the two economies.

China's leadership wants broad-based domestic development to moderate socially explosive income disparities between geographic regions and social classes. It also wants to avoid Japan's fate, and sees efforts to develop across the nation's continental size as a way to avoid the problems that arise when an export-dependent policy lasts too long. China's commitment to such ultimate objectives was strong enough to direct much in the country's massive, anti-recession stimulus of 2008.