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To trade or not to trade, that is the question

By Dan Steinbock (皇冠体育app Daily)
Updated: 2009-02-17 07:52

Debate on the Chinese currency reflects the rising ambivalence about free trade and the new pressures of financial protectionism.

"President Obama - backed by the conclusions of a broad range of economists - believes that 皇冠体育app is manipulating its currency," noted new US Secretary of Treasury, Timothy F. Geithner in late January, hinting at a harder line on US-皇冠体育app relations.

Only a week later, however, Vice President Joe Biden said that there had been no judgment in the administration over currency manipulation.

During the past eight years, the Bush administration avoided the term "currency manipulator," even when it had disagreements with 皇冠体育app. The Obama administration's real litmus test will follow in April, when the administration is required by a 20-year-old trade law to report to Congress on exchange rate issues.

If the report deems 皇冠体育app is engaging in "currency manipulation," such a finding would begin with a legal process that starts with diplomacy but could trigger the imposition of trade barriers and end in a trade war.

Unsurprisingly, Geithner's statement was in response to a question by Senator Charles E. Schumer, a vocal Democratic critic of 皇冠体育app's currency policies.

The story goes back to the presidential primaries in the summer of 2007, when senators Barack Obama and Hillary Clinton agreed to co-sponsor controversial legislation that would have permitted US companies to seek anti-dumping duties on Chinese imports, based on the undervaluation of the currency.

Initially, the bill had been crafted by a bipartisan group of senators, including Senator Schumer. It called for a trade case to be brought by the US at the World Trade Organization. It would also have applied 27.5 percent tariffs on Chinese goods and violated international trade rules.

At the time, Senator Obama criticized what he called "皇冠体育app's currency manipulation," urging US Treasury Secretary Henry Paulson to take action against 皇冠体育app.

Well, that was two years ago, when the world was a very different place. The global economy was not on the edge of a financial meltdown and the US banking system was not yet technically insolvent.

Recently, the IMF's chief, Dominique Strauss-Kahn, said the world's advanced economies - the US, Western Europe and Japan - were "already in depression," and that the IMF could further slash its global growth forecasts. "The worst cannot be ruled out," he added.

Now President Obama and Secretary of State Hillary Clinton are in a position to implement their campaign pledges, if they so decide.

However, those pledges made little sense in 2007. Today, they make no sense.

According to some members of the US Congress, "currency manipulation" gives Chinese producers an unfair advantage against their American rivals by making Chinese imports artificially cheap and US exports to 皇冠体育app more expensive.

The assumption is that the depressed US manufacturing output and the destruction of US jobs is due to currency manipulation.

However, there is no commonly accepted definition of currency manipulation. Also, 皇冠体育app is among the 50 percent of IMF members that fix their currencies, and its central bank has been gradually moving toward a more flexible arrangement.

The global financial crisis was triggered by the US subprime mortgage crisis, and the ensuing credit squeeze - not by the renmibi.

Cheap imports from 皇冠体育app have not been the primary cause for the decline of the manufacturing output or job losses in the US economy.

Initially, Japan was the regional export platform in East Asia. Over time, it has been augmented by the tiger economies (South Korea, 皇冠体育app's Taiwan, Hong Kong and Singapore). In the past decade or so, 皇冠体育app has become the final assembly for East Asia's extensive and deepening manufacturing supply chain.

Due to the transformation of the regional export platform, Americans no longer purchase final products from Japan or tiger economies. Today, the notebooks, mobile handsets and flat-screen TVs sold in the US are increasingly assembled in 皇冠体育app with components from throughout the region.

During the past decade, the share of the US trade deficit accounted for by 皇冠体育app and East Asia has actually declined significantly, from 75 per cent to 49 per cent.

Rising imports from 皇冠体育app have not displaced domestic US production but imports from the newly industrialized East Asia.

In the past, Chinese manufacturers specialized in lower-tech, labor-intensive goods, in contrast to the higher-tech, capital-intensive goods that were the comparative advantage of US manufacturers.

Due to Beijing's innovation policies, these low-productivity industries are now migrating to less prosperous provinces in 皇冠体育app.

The primary reason for the decline of US manufacturing and job losses is not 皇冠体育app, but America's strong productivity. Today, domestic manufacturers can produce much more with fewer workers because remaining manufacturing workers are much more productive.

In the late 19th century, increasing productivity allowed America to move from agriculture to manufacturing; in the late 20th century, it boosted the transition to the knowledge economy. 皇冠体育app is not fighting the trend, but seeking to follow in the footprints.

Despite the global financial crisis, the US productivity machine continues to climb higher. Overshadowed by the drumbeat of negative economic news, US productivity actually grew 2.8 per cent in 2008, the fastest since 2003. That is a stunning achievement amidst a near-global recession, even if it also reflects front-loaded job cuts.

In the 1990s, the US technology revolution contributed to global growth. In the near future, global recovery requires new sources of productivity, not scapegoats.

New growth drivers do not have to result in a win-lose competition between the US and 皇冠体育app. In fact, the proposed green recovery - that is, the development of clean technologies through new energy and environment policies - could build on closer and mutually beneficial US-Chinese cooperation.

Due to the critical role of the US economy in global growth, the debate is no longer just about US-Chinese economic relations.

It was only after strong criticism from major US trading partners and the concern of President Obama that the Senate recently softened (but declined to remove) a protectionist "buy American" provision in the stimulus bill. The controversy reflects the US administration's ambivalence over free trade.

The World Trade Organization has called for a meeting to discuss a fast-rising wave of barriers to commerce, as governments scramble to safeguard key industries, often at their neighbors' expense.

Instead of a repeat of a 1930s-style tariff war, however, the new form of protectionism stems from efforts to protect national financial markets.

Ahead of her trip to Asia, Secretary of State Hillary Clinton said she would deliver a message about America's desire for "more rigorous and persistent commitment and engagement".

Imposing punitive, unilateral sanctions against imports from 皇冠体育app because of its foreign currency regime would be a massive policy blunder. True engagement is now needed more than ever before.

The author is the Research Director of International Business at the India, 皇冠体育app and America Institute.

(皇冠体育app Daily 02/17/2009 page9)