The ongoing spat between Washington and Beijing over the level of China’s currency intensified this week. America complains that the Chinese policy of fixing the yuan to the dollar gives the world’s biggest exporter an unfair trade advantage. After President Barack Obama called for China to adopt “a more market-oriented exchange rate”, Chinese premier Wen Jiabao insisted that the yuan was not undervalued. And foreign pressure to revalue it amounted to protectionism. In retaliation 130 US congressmen urged the president to brand China a “currency manipulator” in a mid-April Treasury Department report on exchange rates.
What the commentators said
China has so far merely hinted that the currency peg is part of China’s global crisis package and will eventually go. Better sooner than later in that case, said Economist.com. The latest export figures were surprisingly strong and inflation is making a comeback. A higher currency would help dampen inflation and encourage a necessary shift from exports to domestic consumption by bolstering households’ purchasing power. However, China is not yet convinced that the export rebound is durable, said Aileen Wang on Reuters.com, so it may not move quickly.
And in any case, the decision is ultimately political, not economic. “Chinese politicians are as unlikely to buckle in the face of Western pressure” as Western politicians would be if they were given a tongue-lashing from Beijing, said Liam Halligan in The Sunday Telegraph. The more America pushes, the longer China will take. So provided America keeps quiet, it may soon get what it wants, said John Authers in the FT. “If it gets more aggressive, then probably not.”
The trouble is it could well get more aggressive. Appeals to the IMF or WTO to force China into action are either unlikely to work, or could take years. That leaves the option of branding China a currency manipulator and imposing unilateral tariffs on it, noted John Foley on Breakingviews. But that could spark retaliation. Unilateral tariffs would be a “nuclear option” that really could lead to “the destruction of the postwar trading system”, said Alan Beattie in the FT. America doesn’t seem “desperate enough” for that yet, although another downleg in the economy plus another jump in unemployment could do it.
“China-bashing” is already rising, said Economist.com. Chalk that up to America’s new-found determination to push its exports – Obama has called for these to double within five years – along with the stubbornly high unemployment rate and impending mid-term elections. The increasingly protectionist tone bodes ill for “a still fragile global recovery”. “The chances of a collision” between China and America, concluded Stephen Green of Standard Chartered, “have never been higher”.