The war of words between the U.S. and China over the valuation of yuan threatened to snowball into a new trade war on Monday with China strongly criticizing a U.S. Congress move letting the government punish countries with undervalued currencies.
China’s Vice Commerce Minister Chen Jian adopted an aggressive posture, saying China would take decisions over its currency according to its own needs and also said that a U.S. Congress bill, which gives the government powers to impose duties on goods imported from countries with undervalued currencies, is redundant.
“We’ll make a decision based on our own economic development levels and the world economic situation. If it takes the yuan to appreciate for our economy to develop, we will do it even though it would have [a] negative impact,” Chen said.
The U.S. has been pressuring China for a long time to let its currency appreciate from trade-distorting low levels and also to leverage on strong domestic demand to spur economic growth.
However, China has stuck to its guns, saying its currency is not artificially undervalued and that the yuan is not responsible for the U.S. trade deficit.
Many U.S. policymakers believe that an undervalued yuan is weighing on the trade balance and hurting U.S. competitiveness.
Lawmakers have said Beijing has deliberately kept its currency undervalued by as much as 25 percent to 40 percent to give their export sector an undue advantage.
While U.S. imports from China were worth $296.4 billion in 2009, its exports to China accounted for only $69.5 billion, giving a U.S. deficit of $226.9 billion, U.S. government data showed.
In the first six months of the year, the U.S. trade gap with China was $119.5 billion.
U.S. Trade Representative Ron Kirk launched a harshly worded attack on the Chinese last week saying Beijing is deliberately tipping the balance of world trade in its favor.
“All we’re asking China to do is play by the rules. Get your thumb off the scales. Let us go in and compete equally,” he said.
“We want government to get its thumb off the scales, we want state-owned enterprises to get out of the business and just let us compete.”
However, China mostly stood its ground, save for the announcement on June 19 that it would further its yuan reform and allow more flexibility. But this proved to be more promise and less action. The revaluation led to only a negligible gain of 2 percent against the U.S. dollar.
With China refusing to let the yuan appreciate considerably, the U.S. House of Representatives Ways and Means Committee approved a bill on Friday authorizing the penalization of countries with undervalued currencies.
This bill hands powers to the U.S. Commerce Ministry to slap duties on currency manipulators whereas under the existing regulation the department could impose duties only in cases of trade distorting subsidies.
“While a multilateral approach to addressing this issue is preferable, we cannot wait any longer to level the playing field for US businesses and protect American manufacturing jobs,” said House Majority Leader Steny Hoyer.
The Ways and Means Committee has sent the bill to the House, and voting is expected to take place this week.
However, there is no sign yet that China will soften its position on the yuan and take a fresh look at its deeply-entrenched policy, as evident from Chen’s combative stance while commenting on the bill moved by the Congress Committee.
“… it is redundant for the U.S. congress to pass the proposal,” said Chen.
China’s Prime Minister Wen Jiabao had buttressed China’s take on the yuan valuation a couple of days ago, during a trip to the United Nations. He ruled out a drastic rise in yuan’s value, saying it would hurt the Chinese economy. He also offered a lesson to the Americans, saying the yuan’s value had no real impact on U.S. trade balance.
Wen reiterated the Chinese are not taking away jobs from the Americans. He said most Chinese exporters sell low-end, labor-intensive goods in the U.S. which are no longer manufactured in the U.S.
While U.S. political leadership is almost unanimous in believing the yuan’s depressed value is hurting the economy, analysts have pointed out that U.S, predominantly a consumer nation, will also stand to lose in case of a drastic yuan rise.
U.S. consumers will have to spend more to buy goods from China while U.S. companies will not gain much by way of competitiveness as the place vacated by Chinese goods will be taken over by cheaper alternatives from other Asian manufacturing hubs.
What are the odds China will relent?
If you go by what Li Daokui, a member of the People’s Bank of China’s Monetary Policy Committee, said last week, there is hardly any chance Beijing will signal a policy makeover to please the U.S.
Li said China had no reason to let the yuan appreciate on external pressure as the country is not entirely reliant on the overseas markets. That voice of rising Chinese confidence looks like a pointer to the battle lines.
He also said the West was likely to increase protectionist pressures on China and India in the future.
If the U.S. pushes ahead with its determination to make China “play by the rules,” as put by Kirk, the trade scene could witness a showdown between the two economic powerhouses, an eventuality which will harm the entire world economy.
Perhaps financial writer and columnist Robert J. Samuelson sums up the U.S. dilemma on the yuan: “The collision is between two concepts of the world order. As the old order’s main architect and guardian, the United States faces a dreadful choice: resist Chinese ambitions and risk a trade war in which everyone loses; or do nothing and let China remake the trading system. The first would be dangerous; the second, potentially disastrous.”
September 27, 2010