COMMENT Geithner gets it wrong on yuan
By Sungjoon Cho
The Barack Obama administration has certainly brought some change to United
States policy. Sharply departing from a more engaging China policy, Treasury
Secretary Tim Geithner rattled the ground by declaring during his confirmation
hearings that China was "manipulating" its currency, the yuan, and vowing that
the US would employ "aggressive" means to remedy this.
Not only are the grounds of such a claim insecure, but the timing and the
manner of his comments are highly inappropriate. The US should not attempt
unilaterally to search for and then destroy economic weapons of mass
destruction.
The accusation on China's currency manipulation is not new. Geithner's
predecessor, Hank Paulson, implied a certain
connection between the current financial meltdown and global imbalances caused
by China's foreign exchange policy. In a similar tone, Representative Sander
Levin, who chairs the sub-committee on trade within the House Ways and Means
Committee, has recently proposed suing China before the World Trade
Organization (WTO) for its alleged currency manipulation.
Yet, a closer scrutiny tends to find such claims barely persuasive. As of
November 2008, China's share of US exports was only 5.4% and its share in US
imports 19.1%. It is too extensive and inferential to argue that China's
currency policy, no matter what it may be, has caused the massive US trade
deficit.
Former Federal Reserve chairman Alan Greenspan observed a few years ago that
even a 20% revaluation of the yuan would not dent the US trade deficit. He was
right: since 2005, the value of the yuan has risen by about 20% and there is no
sign that it has helped reduce the US trade deficit.
Most economists agree that the real culprit of the US trade deficit should be
identified among domestic factors, such as the low US savings rate. Any
artificial trade barriers against China would simply result in the replacement
of Chinese products imported by the US by those made in other developing
countries, such as Vietnam and India.
Nonetheless, let us suppose that there are reasons to believe China does
manipulate its currency. Even then, would the unilateral, aggressive remedies
proposed by Geithner and Levin be practicable and effective? The answer is
"no".
First, how could the US substantiate that China has in fact manipulated the
yuan? The more precise question is by how much? Then, the next question is how
many dollars has the US lost on account of such manipulation? The thin line
between "manipulation" and "intervention" tends to reinforce these doubts.
Is there any central bank which never intervenes in the currency market when
necessary? Moreover, should all countries, including China, adopt a US-style
free-floating foreign exchange policy? From the US perspective, any "managed"
foreign exchange system might be seen as manipulated.
Second, even if the US comes up with its own proof and bases any retaliation
against China on such proof, would other nations, including China, accept such
unilateral determination?
Certainly, there are several domestic statutes, such as "Section 301", which
authorizes the US government to act. However, without any genuine multilateral
consensus, in particular any formal endorsement from the International Monetary
Fund (IMF), such a unilateral stance would soon backfire. The lack of
multilateral support tends to carry an aura of illegitimacy, as was seen in the
George W Bush administration's invasion of Iraq without the United Nations'
support.
Third, the timing of such an aggressive stance could not be worse. Currently,
China is also suffering from the fallout of the global financial meltdown.
Nouriel Roubini, professor of economics at the Stern School of Business, New
York University, even believes that China is about to enter into a recession.
Its exports are rapidly dropping and unemployment is rising. Does Washington
really believe that China will give in to US muscle-flexing under these
circumstances? Even if the US were to win this game, it would probably be a
Pyrrhic victory, obliterating decades-old good economic relations between the
two countries.
Finally, would the WTO be the correct forum to adjudicate this kind of dispute?
The answer is also "no". The WTO is simply not the IMF. Nor does it appear that
the export subsidy argument is provable and meritorious. Therefore, the US
would not have its day in the WTO tribunal. Remember that the United State
Trade Representative (USTR) has already rejected the same call from the US
Congress twice (in 2004 and 2005). Any such attempt would merely break the
WTO's back without any returns.
Admittedly, Geithner's comments might just be political posturing. He might
have felt that he should somehow please Congress during his appointment
hearing. The fact that he is an expert himself in this currency issue might
support this observation. (He was under secretary of the Treasury for
International Affairs from 1998 to 2001.)
Yet if he, or Obama, ever attempts to create a fog of currency manipulation to
serve whatever political goals, the cost would be heavy. Anti-Bush should not
necessarily be anti-logic. The Obama administration should not discontinue one
of the rare positive legacies from the Bush years - the engagement policy with
China, which includes the "US-China Strategic Economic Dialogue".
Nor should it repeat the Bush administration's most devastating mistake in
opting to go it alone on such a major international issue - as when the US
charted its own path on the issue of Iraq's weapons of mass destruction - by
summarily dismissing something that Bush had actually done correctly.
Sungjoon Cho is associate professor of law, Chicago-Kent College of Law,
Illinois Institute of Technology. E-mail: scho1@kentlaw.edu
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