June 18, 2011 – 5:23 p.m.
Political Economy: Appreciating the Yuan
By John Cranford, CQ Columnist
Congress really has no idea what to do about America’s trade deficit with China. Nor, for that matter, does the Obama administration or maybe anyone else. It’s not even evident that the Chinese know how to manage their economic relationship with the United States. Suffice it to say that the two countries are so interdependent, and such mirror images of each other, that whatever each does greatly affects the other.
Consider the years-old dispute over the yuan, China’s currency, which is universally judged to be greatly undervalued. Democrats, particularly in the House, along with some Republicans, want to take aggressive steps to punish China for not allowing the yuan to trade at levels that the marketplace would decide are appropriate — or at least force formal conversations or even negotiations over exchange rates.
The intent is to help level the international-trade playing field and improve the competitiveness of American companies both here and abroad.
But all the talk — and the occasional flurries of legislative chain rattling — are mostly for naught. There’s plainly no way that the current president or probably any president would permit a formal declaration of a trade war, and that’s what many observers fear would result.
It may be the case, though, that the periodic, reflexive outbursts about the yuan on Capitol Hill have the salutary effect of reminding the Chinese that not everyone in Washington is afraid of what might happen if we got tough.
So was last week’s news that House Democrats are preparing to force the issue a sign that the climate has changed, or merely another set change in the long-running drama?
Last September, a bipartisan majority of the House passed a bill that would have permitted the Commerce Department to decide whether the yuan-dollar exchange rate amounted to an unfair government subsidy and to impose unilateral countervailing duties on Chinese imports as an offset to the subsidy. The Senate never got close to considering the measure, however. And if such a bill ever seemed destined to be enacted, its opponents — and there are many — would put up a much more vigorous fight.
Regardless, Minority Leader
They aren’t talking about the economic and political upheaval that would occur in China at the same time, of course.
No matter. Republicans are balking — even though Ways and Means Chairman
What’s the Point?
Although this may appear merely to be an unsurprising exercise in politics, this latest gambit is also dictated by events that call attention to this particular issue every six months or so.
Political Economy: Appreciating the Yuan
Since 1988, the Treasury has been required to report twice a year about the exchange-rate policies of the country’s major trading partners. Those reports, which started long before the Internet gave anyone instant access to such data, helped generate a drumbeat of support for China to stop tying its currency directly to the dollar.
In its most recent report, on May 27, Treasury said the yuan’s rate of appreciation has been “insufficient” so far and that “more rapid progress is needed.” But Treasury also declined to say China is manipulating its currency, a formal designation that would be an aggressive move triggering conversations between the countries.
It is possible to find signs of improvement in the U.S. trade relationship with China. The yuan has strengthened almost 22 percent against the dollar in the past six years. And it has gained 5 percent in the year since China ended a recession-long moratorium and said it would again allow the yuan to appreciate. The trade gap continues to widen in dollar terms, but the rate of increase in U.S. sales to China was almost twice as great over the past decade as was the rate of import increases. And the pattern of more-rapid export gains is continuing this year.
Moreover, for all the talk of China abandoning the United States and selling its Treasury security holdings, the opposite is true. China has increased its investment in Treasurys and now holds more than a fourth of those traded abroad. No one would benefit if this tight connection were severely threatened.
One tenet of Chinese culture is patience — easy to advocate in a 5,000-year-old society and not such a common commodity here. Beijing may soon announce additional flexibility in exchange rates. But critics say such promises are laughable, so lawmakers will keep pounding on the administration to get tough. And the path of the yuan’s appreciation is likely to stay constrained for some time.