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March 24, 2006
Nothing if not predictable
Senators Schumer and Graham are in China. Things are progressing as you might expect.
BEIJING (Reuters) - U.S. senators threatening China with sanctions unless it revalues its yuan said on Wednesday that letting the currency float would solve problems in both countries.
...
"We have been made aware of the problems here in China, we're well aware of the problems in America, and we do believe that letting the currency float will help solve the problems -- one country needing more consumption and one country needing more investment and production," [Sen. Charles] Schumer told reporters.
...
"What we're trying to look for is a process that is not responding to political pressures, but one that is responding to economic reality, because I do believe ... that it's in the best interest of the Chinese people to allow a market-based currency," said [Sen. Lindsey] Graham.
The senators were not looking for a timetable or specific goal, Schumer said, but wanted to be convinced that China is moving in its own way toward letting the currency float.
He said he was not convinced that was happening.
If not a timetable or a specific goal, then what?
The Senate Finance Committee is also working on a bill aimed at addressing trade irritants with China as an alternative to the Schumer/Graham initiative, but there were no details of the legislation.
The details will come later when it is time for the Senate to save face. I would expect that to happen around the time of the Chinese president's trip to Washington. Everyone will want to be able to declare victory.
Let me go on record once again that I do think the yuan is undervalued and that an appreciation is inevitable. The only questions are how and when. Slow and steady seems to be the approach. Seeing as how they will get one chance to get it right, that seems sensible. Our rattling of the tariff sword in this particular instance at this particular time is less sensible to me. It is election year politics, pure and simple.
UPDATE: The Wall Street Journal has the latest on the Sentators' trip.
"We are more optimistic that this can be worked out than we were in the past. But whether it will be, we're not certain yet," Mr. Schumer told reporters after three days of meetings with senior Chinese officials, including the central-bank chief and the commerce minister.
If you look at the story from a couple of days ago, you have to ask what it was that made them more optimistic. Timetable? Specific goals? Other? Or is this, well, you know...
Mr. Graham said he was struck by the magnitude of China's problems -- for example, unemployment -- and how those issues weigh against sharp changes in currency policy. "I am more sensitive now than I was before to how hard it will be to move toward a floating currency," Mr. Graham said. But, he added, "I am more committed than ever to make sure that occurs," to ensure "harmony" in U.S.-China relations.
There's your sound bite. I, too, would like the increased flexibility to occur at a pace that is sensible given China's domestic policy concerns. That's what I've been saying all along.
The Senators can now return home and work on the speeches in which they tone down the tariff talk and claim victory. But if you think that the Senators' trip will change very much, you are more optimistic than I.
But I'll bet it was a great photo op.
UPDATE 2: Sestina has a comment to this post with a link to a Stephen Roach article on this issue. Roach gets it right and gets a quote that I didn't see in the MSM.
Posted by William Polley at March 24, 2006 12:25 AM
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Comments
If you haven't seen it yet, check out Stephen Roach's comments about his conversations with Schumer in China from 3/22.
http://www.morganstanley.com/GEFdata/digests/20060322-wed.html
Posted by: Sestina at March 24, 2006 10:03 AM
Right on. I can't believe that Schumer would say "This is exactly what I did in Japan in 1986. It worked in Japan, and it will work in China."
I'm speechless.
Great negotiating tactic. Compare your counterpart to a country that spent a decade in depression after your last plan "worked". (Note: Not to suggest that our efforts to get the yen up in the '80s were entirely responsible for their dismal performance in the '90s, but the events are intertwined--see Ronald McKinnon's latest book.)
I just hope that next month's state visit can calm down some of this foolishness before it spins any further out of control.
Posted by: William Polley at March 24, 2006 1:52 PM