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.
