Exclusive: Is the Treasury Scared of China?
by WILLIAM R. HAWKINS
July 13, 2010
On July 8, The U.S. Treasury released its semi-annual Report to Congress on International Economic and Exchange Rate Policies. The reports are mandated by the Omnibus Trade and Competitiveness Act of 1988. Under Section 3004 of the Act, the Report must consider “whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.” The Treasury claims that for the period covered in this new report (July 1, 2009, to December 31, 2009), no major trading partner of the United States met the standard set out in the law.
This is nonsense and constitutes a failure by the Treasury to do its duty. The department is obviously afraid to reach a conclusion that would bring the United States into confrontation with the People’s Republic of China, even though the report states all the evidence needed to reach the right conclusion.
In the section of the report devoted to China, it is said, “Cumulatively, China has been a net purchaser of foreign exchange over the last ten years, as China has acted much more often to limit renminbi appreciation, rather than depreciation. These foreign exchange purchases reflect the PBOC [People’s Bank of China]’s efforts to resist renminbi appreciation against the dollar.” A bit further on, it is stated, “Under its heavily managed exchange rate regime, China’s reserve accumulation is in large part a reflection of resisting full appreciation that reflects market demand for the renminbi.”
Earlier is the report, it is argued, “China's continued foreign reserve accumulation, the limited appreciation of China's real effective exchange rate relative to rapid productivity growth in the traded goods sector, and the persistence of current account surpluses even during a period when China's trading partners were in deep recession together suggest that the renminbi remains undervalued.” How do these statements not fit the definition of manipulation for competitive advantage set out in the 1988 Act?
It is not a lack of knowledge that prevents the logical movement from evidence to verdict, it is cowardice. And when the government fails to defend the national economy from foreign predators, it is the people who suffer. In this case; from decreased job opportunities, lower incomes and reduced security as China uses its gains from trade to support policies around the world that are at odds with American values and interests.
The Treasury places great emphasis on the June 19, 2010 announcement by the People’s Bank of China that it was ending its peg to the dollar and supposedly allowing its exchange rate to appreciate in response to market forces. "What matters is how far and how fast the renminbi appreciates," said Treasury Secretary Tim Geithner when his department’s Report was released. "We will closely and regularly monitor the appreciation of the renminbi and will continue to work towards expanded U.S. export opportunities in China that support employment in the United States, in close consultation with Congress," he declared.
Yet, the alleged policy change was nothing of the kind. Indeed, the PBOC said at the time that it would do nothing that would hurt Chinese exporters. There were two reasons for China to shift from a dollar peg to a basket of currencies. The first was about economics. China needed to protect itself not only from a falling dollar, but from a falling euro as the EU debt crisis spread beyond Greece. The move was thus an expansion of mercantilism, not a shift to liberalism. The second function of the announcement was political, to head off criticism of its policies at the G20 summit meeting, and to provide Secretary Geithner with an excuse to keep his head buried in the sand.
When China last allowed “flexibility” in the renminbi during the years 2005-2008, it kept a close eye on the trade balance to make sure its surplus remained intact. In 2005, the U.S. deficit with China in goods was $202.2 billion. In 2008, the deficit had worsened to $268.0 billion even though the renminbi had appreciated 17.5 percent. Beijing then stopped the appreciation in 2008 as the global recession hit to make sure it could continue to run surpluses even as world trade declined. This includes the period covered by the Treasury report. Most economists think the renminbi is undervalued by 30-40 percent.
Though China’s overall trade surplus fell somewhat during the global recession last year as foreign markets declined, it remained high with the United States and helped to undermine the American recovery. The numbers in the Treasury report showed the 2009 merchandise trade deficit with China at $226.9 billion, by far the largest imbalance on the list of U.S. trading partners. The second largest was $50.6 billion with the Euro area, followed by $47.8 billion with Mexico. The same pattern is shown to be continuing into 2010. While the outsourcing of jobs to Mexico under the North American Free Trade Agreement (NAFTA) is an important element, the U.S. also imports oil from south of the border. The trade deficit with China is purely a function of the transfer of manufacturing across the Pacific, a development that not only affects jobs and finances, but changes the balance of power as industrial growth in China strengthens Beijing’s military capabilities.
The Treasury report has an Annex that lists the 17 national economies that account for the bulk of global foreign currency reserves. These 17 countries held $6.1 trillion of the $8.1 trillion global total at the end of 2009. China led the list with $2.3 trillion, which is 35 percent of the world’s reserves. Today, U.S. reserves are only $126.6 billion, less than 6 percent of what Beijing controls. Ten countries hold larger reserves than the United States.
Treasury says, “The decline in [China’s] current account surplus is likely to be reversed unless the government perseveres with policy efforts to rebalance the economy and to advance and implement a more flexible, market-determined exchange rate.” China’s exports are already expanding again, and it ran a trade surplus of $20.billion in June.
One of the most ridiculous statements in the Treasury report appears on page 17: “To solidify the recent progress in reducing China’s current account surplus, the government must implement exchange rate reform to complement the other structural reforms listed above.” The other reforms are macroeconomic policies that support domestic demand. But why would Beijing want to do this? There is no indication that Chinese leaders think the decline in the trade surplus last year was a good thing to be perpetuated rather than corrected. The Treasury itself notes that China’s falling trade surplus slowed its economy.
While it is true that Chinese policy is trying to bolster domestic demand, and a large government stimulus package was used to offset some of the drop in exports to maintain growth and employment, there is no reason to think Beijing does not want to expand exports to add to national growth. After all, President Barack Obama has been talking up a plan to double U.S. exports to bolster American growth. Everyone is looking for ways to expand, which is why the world economy is such a cutthroat commercial battlefield.
The Treasury report argues as if it was making policy in Beijing,
Exchange rate appreciation should play an important role in rebalancing China’s economy towards domestic demand-led growth. It could also expand China’s ability to set an independent monetary policy appropriate for Chinese economic conditions.
Greater flexibility of China’s exchange rate should also reduce incentives for foreign exchange intervention by other countries trying to maintain trade competitiveness vis-à-vis China.
Beijing is setting its own monetary policy and doing a much better job at it than is the United States. China’s real GDP rose by 9.1 percent on a year-over-year basis in 2009, and by 11.9 percent in the first quarter of 2010. Its behavior has not reduced the need for other countries, particularly the United States, to change their policies to regain competitiveness. Just the opposite. The need to confront Beijing is stronger than ever as America struggles through a slow and fragile economic recovery.
Unfortunately, the Treasury does not want to act to advance America’s national and international economic interests or protect domestic firms and employees. Such actions would run against the liberal ideology that dominates its thinking. Yet, Chinese predatory tactics have cost Americans millions of jobs and trillions of dollars. It has been this massive transfer of wealth, productive capacity and technology to China that has propelled its rise as a “peer competitor” across the globe. Future historians will look back and marvel at the failure of Washington’s leaders to stem the tide and defend U.S. preeminence while they still could.
FamilySecurityMatters.org Contributing Editor William R. Hawkins is a consultant specializing in international economic and national security issues. He is a former economics professor and Republican Congressional staff member.