April 21, 2005

Yuan Point of View, Part 2

If the Bush administration is "flailing ineffectually" over the issue of relative currency values, and China in particular holds to its weak yuan policy, what happens next?

What could happen is what often happens in countries confronted by major trade imbalances: a surge of protectionism. Tariffs slapped on Chinese imports? Ratification of the new trade treaty with the Central American countries (CAFTA)? The Economist points out in detail that Congress will favor the first and not the second the longer the current situation continues. For free traders, this is exactly backward.

Protectionist measures, like those being promoted by Sen. Charles Schumer (D-NY), could put the United States in flagrant violation of its World Trade Organization obligations and undermine the effort to conclude a new worldwide agreement on further trade liberalization. Rejection of CAFTA -- as trade agreements go, fairly small potatoes --would signal the administration's inability to get Congressional approval for any deal it did negotiate. A slide away from rather than toward freer world trade could accelerate rapidly.

Former USTR Robert Zoellick made sure his agency was prepared to lobby for CAFTA ratification before he left to become Deputy Secretary of State, and his nominated replacement, Rob Portman, is a capable guy who should be able to lead a ratification fight effectively. But administration action to head off protectionist measures aimed at China would likely have to be led by Treasury Secretary John Snow. I don't want to be unfair to Snow -- Secretary of the Treasury was a prestige post in the Reagan and Clinton administrations, but ranks somewhere just above the Special Assistant to the President for Correspondence in this one -- but his performance to date in discussing economic issues publicly does not inspire much confidence.

President Bush's inspires even less. While he has been traveling around the country soaking up applause on his Social Security tour and encouraging a train wreck in the Senate over a few appeals court nominees, he hasn't said much about trade. Perhaps he's waiting for a crisis, like a major fight in Congress to stave off protectionist legislation or keep CAFTA from being rejected outright. It doesn't look as if he will have to wait long, and his administration isn't ready.

Posted by at April 21, 2005 05:12 PM | TrackBack (11)

A few questions... Why is a trade imbalance bad? And if protectionism is not the solution then what is the solution? Finally, if the weak dollar is causing this, wouldn't a strong dollar make it even worse as American made goods would be less attractive in terms of cost?

Glenn Reynolds has posted a WSJ snippet (subscriber only) about unrest amongst the investor class. Also, I've read in the Investor's Business Daily that Chinese manufacturers are quite unhappy with the current situation. The low dollar is putting a tremendous amount of strain on the entire way China is setup to function economically. Having the Yuan pegged lower than the dollar certainly means Chinese mass market goods will always be more attractive than American mass market goods, but in the process of meeting that demand; Chinese manufacturers must buy more equipment, machinery, oil, gas, diesel fuel, and other materials. Many of those purchases are imports, increasingly expensive imports, especially from their friends in Europe.

Posted by: The Indigent Blogger at April 22, 2005 12:19 AM | Permalink to this comment Permalink

Just so we're clear: the dollar is overvalued (strong) relative to the yuan and some other Asian currencies. It is weak relative to the euro.

The linked items you mention suggest the complexity of this situation. Export driven growth is part of the Chinese government's reason for keeping the yuan pegged to the dollar, but China is an enormous country that also imports a great deal -- it runs a trade deficit with the world as a whole minus the United States -- not all imports are related to its exporting industries, and consequently not all Chinese are happy with a weak-yuan policy.

Posted by: JEB at April 22, 2005 03:43 AM | Permalink to this comment Permalink

Agree on all points, especially the lack of preparedness of the Bush Admin to head these all-too-predictable trade grumbles off at the pass.

The Economist article you cite has a bit different take on the dynamics of bargaining on the Hill. They suggest:

"The betting is that, with enough presidential involvement and vote buying, Mr Bush may get CAFTA through in the next couple of months. Until he does, there will be little appetite in the White House to give the China-bashing in Congress the cold shoulder that it deserves."

I hope the Economist is wrong on the politics. CAFTA would be nice, but letting the China-bashing get a head of steam is really playing with fire. Especially at the same time they're already demonstrating pyromaniac tendencies with their pressure on China to revalue.

My read of Greenspan's remarks today on the prospects of a revaluation in the relatively near term is that at least he's trying to calm down Congressional impatience on China. But this should be much better stage managed with Treasury. Ah well, I can dream can't I?

Posted by: nadezhda at April 22, 2005 04:30 AM | Permalink to this comment Permalink


Posted by: greg at April 25, 2005 03:15 AM | Permalink to this comment Permalink
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