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February 24, 2006
Currency manipulators?
This Wall St. Journal (subscription req'd) article alerts us to a potentially troublesome situation. To those who watch these events closely, it's just another drip from the faucet. It's not going to go away any time soon either.
Last week, U.S. Trade Representative Rob Portman announced a task force to take up complaints about unfair Chinese trade practices. U.S. politicians allege that China deliberately keeps its currency weak to make its exports cheaper in dollar terms and U.S. imports more expensive.
Now, the U.S. Treasury, which has so far sought to avoid confrontation with Beijing over the currency issue, is preparing the ground for a possible decision to label China a "currency manipulator," in a regular review scheduled for April, although the semiannual report often is issued well after the scheduled release date. The Treasury has been sounding out Wall Street investors about such a move, which would require the U.S. to open formal talks with China on the issue.
I have trouble understanding how they get "currency manipulator" from a fixed exchange rate whose only move in the last decade has been (albeit slightly) in our favor. I understand that it is a political label. The effect of the label is to force talks between the two countries. Ok, fine.
But this business about a 27.5% tariff on imports from China is ludicrous. All that would accomplish is to turn the clock back on our economic relations with China. It's not going to force them to speed up the financial modernization process as much as Congress might like to think it would. Even if it did, a revaluation is not going to solve all our problems. It may not even shrink the overall trade deficit that much at all.
What is odd is the way that Secretary Snow is turning around 180 degrees on this issue so suddenly. Why it seems like only a few short months ago, I posted a link to this story from the New York Times.
BEIJING, Oct. 17 - For two years, Treasury Secretary John W. Snow has pushed and prodded China to let its currency float more freely. On Monday, he declared his satisfaction and changed the subject.
After a week of meetings from Shanghai to Beijing, Mr. Snow buried his specific demands for the yuan beneath a broader call for China to overhaul its system of banking and investment.
The stance sounded bolder and more ambitious, a demand for China to clean up its banks, build a sophisticated market for trading currencies and let Wall Street firms become full-fledged players in the stock market.
But the new call was also a retreat. By closely linking the narrow issue of the currency to long-term goals of "financial modernization," Mr. Snow implicitly gave Chinese leaders years to adopt anything close to a floating exchange rate.
"We are here to encourage the progress, to support the progress," he said on Monday. "Moving toward a truly flexible exchange rate regime requires quite a large number of steps," he added. "We recognize that will take some time."
And you thought I'd forgotten!
As I have pointed out here and here more recently, steps have been taken moving China in the right direction. So what gives? It's not unambiguously clear that the President himself would favor the tariff option (been there, done that). Does this have to do with the Congressional election cycle? Perhaps. Is it just cheap talk? Will Sec. Snow do another turnaround in a few months? Are they positioning themselves to claim victory if there is another small revaluation this year?
I think you know how I would answer those questions at this point. This is something we definitely want to keep an eye on.
Posted by William Polley at February 24, 2006 12:12 AM
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Comments
Fixed exchange rates are currency manipulation. If you seriously believe they are not, than tariffs cannot be either. Do you beileve in free trade or free lunch? They may be in our favor as far as imports, but out of our favor as far as exports. As consumers we may benefit, as producers we suffer.
Posted by: Lord at February 24, 2006 01:17 PM
It depends on the "rules of the game". If a country announces a commitment to peg the currency to the dollar, yen, euro, or whatever, and then sticks to that commitment, I have a hard time interpreting that as manipulation. After all, sometimes we recommend currency boards as a commitment device for high inflation countries. No one calls it manipulation then. I tend to think of manipulation as being actions contrary to the "rules of the game" (come up with your own examples--too many to choose from).
Is labeling someone a manipulator a form of manipulation in itself? Does threatening to label China as a manipulator have the goal of inducing them to take an action that is more in our interest than theirs?
China's hard peg helped them dodge a really big bullet during the Asian financial crisis. I don't blame them at all for being reluctant to modify the "rules of the game" for a few years after that. But in the last year or two they are showing signs of moving. A few months ago the Treasury was all smiles. China is not breaking the "rules of the game" but rather signaling far ahead how the rules will change.
And now the Treasury does a 180 degree turn from its position in October, even as small steps to reform continue.
This strikes me as curious, that's all.
Posted by: William Polley at February 24, 2006 03:47 PM
Rules of the game indeed. It would indeed be possible for China to maintain a realistic pegged currency, but this would require all manner of changes to maintain it in the face of differing fiscal and monetary policy. Instead it is done via fdi controls, exchange controls, etc. If they actually let it float but provided export subsidies to maintain constant export prices would it still not be manipulation? Free lunchers have not gorged themselves enough and are demanding more.
Posted by: Lord at February 25, 2006 08:45 PM
The worst thing about any kind of peg is that adjusting it once causes changes in expectations for future adjustments. I think it is in their interest to let the yuan appreciate, but I really want to make sure they get it right. It seems pretty clear that the Chinese know that the current situation is unsustainable, but it's a delicate process.
Brad Setser has a nice post on the Chinese monetary policy angle.
http://www.rgemonitor.com/blog/setser/119011
PGL notes over at Angry Bear that my view in this post (and in the follow up) are similar to Jeffrey Frankel's.
http://angrybear.blogspot.com/2006/02/polley-and-setser-on-yuan.html
And it looks like he and I are on the same page about whether to call it manipulation. If this is, so is most international political economy (including things that the U.S. has done).
Posted by: William Polley at February 26, 2006 11:24 PM