Japan, no economic small fry, challenged China last month. The conclusion of the dispute is a cautionary tale for countries confronting China about currency manipulation.
In September, Japan seized a Chinese trawler captain after his boat collided with two Japanese Coast Guard ships near some East China Sea islands claimed by both countries.
Immediately afterward, China "coincidentally" detained four Japanese employees of Fujita Corp., charging them with filming in a restricted military area. When Japan proposed a prisoner swap, China upped the ante instead -- halting shipments of rare earth minerals to Japan. China controls 93 percent of the world's rare earths, which are minerals essential for manufacturing high-tech and energy-efficient products, from cell phones to wind turbines.
Japan caved, releasing the Chinese captain unconditionally. Suddenly, China rescinded its restriction on rare earth exports to Japan and released three of the four imprisoned Japanese nationals, ending the dispute one captive ahead of Japan.
This incident confirmed China as a burly international tyrant. The caution for countries attempting to negotiate with China is to avoid Japan's mistake, which was single-handedly contesting the giant. For America, that means seeking an end to China's currency manipulation by simultaneously pursuing every option the United States has, including formally naming China a currency manipulator, imposing tariffs on imports from countries that undervalue currency and creating a community of allies to campaign together to combat the illegal trade practice.
Rallying partners should be reasonably easy, as Japan, Brazil and the European Union all have exhorted China in recent weeks to allow the value of its currency to freely float on international markets.
Like the United States, each has acted unilaterally. Last week, EU finance ministers confronted Chinese Premier Wen Jiabao at a European-Asian economic summit in Brussels. Wen rejected their demands for China to speed appreciation of the yuan in relationship to the euro.
Also last week, Brazil doubled a tax it charges foreigners who purchase Brazilian bonds. This was an attempt to slow speculation that has increased the value of its currency, the real, by 39 percent against the dollar over the past 22 months.
A day later, Japan announced it would lower its benchmark interest rate and purchase $60 billion in government bonds and securities, both actions designed to lower the value of the yen, which would cheapen its exports.
The Swiss tried intervening in the market in 2009 to hold down the value of its currency, the franc, but failed. Singapore, Thailand, India and Canada have considered it.
So far, America has just attempted to persuade China to stop undervaluing the yuan -- a practice that artificially suppresses the price of Chinese exports while at the same time artificially raising the price of imports into China from America and other nations. China's deliberate currency undervaluation accounts for a significant part of America's massive trade deficit with China.
Last spring, the United States asked China politely to allow the value of its currency to float up. As the United States awaited China's answer, the U.S. Treasury delayed issuing its semi-annual foreign exchange report in which it could name China as a currency manipulator, then initiate a formal response.
China replied June 19 that it would allow the yuan to float on international currency markets. Treasury then released its report - which, no surprise, failed to list China as a currency manipulator. Since China's announcement, the yuan has increased in value less than two percent - this for a currency believed by many economists, including the conservative C. Fred Bergsten, director of the Peterson Institute for International Economics, to be undervalued between 25 and 40 percent.
Annoyed with China's failure to keep its pledge and angry over unfair trade gutting two million jobs from the body of the American economy over the past decade, Congress reacted just before its recess. With massive bi-partisan support, the House passed a bill that would allow the Commerce Department to impose tariffs on imports to counter the effects of currency manipulation. If passed by the Senate and signed by President Obama, it would expand the definition of improper government subsidies to include manipulation of currency to gain trade advantages.
Afterward, just nine days before the next Treasury report on currency manipulation is due on Oct. 15, Treasury Secretary Timothy Geithner, in a speech at the Brookings Institution, offered thinly veiled criticism of China's persistent manipulation:
In rebuffing the European Union's request for revaluing, the Chinese prime minister claimed allowing the yuan to appreciate too quickly would bankrupt Chinese factories as their prices rose to uncompetitive levels, and the resulting exodus of unemployed workers to the countryside would provoke social unrest.
No one wants that. Workers everywhere applaud the rise of millions of Chinese citizens out of abject poverty. But increasing the value of the yuan will benefit Chinese workers at the same time as it begins to balance currencies worldwide. An appreciated yuan effectively increases Chinese workers' wages.
By deliberately undervaluing its currency, the government of China is waging a stealth trade war against the rest of the world. Independently, the United States must protect its economy, but to reign in this international outlaw, America also must secure the help of a posse.
Follow Leo W. Gerard on Twitter: www.twitter.com/uswblogger
http://www.nytimes.com/2010/10/13/business/energy-environment/13solar.html?ref=business
Isnt the issue about the transfer of jobs and industries from eg the US via a reverse tariff on US goods using subsidies. They do what US states do only much better. They lure factories to their realm with incentives. A friend who is well connected in luxury yachts, told me of an australian manufacturer who moved production there. The incentive was not cheap wages (they still use mainly aussies), but a state of the art factory, rent free on a profit sharing basis. Any where you want and it can be built in months.
Of course the elite and their neocon stooges are short sighted. No point getting rich if it takes two lifetimes. But govts are supposed to rise above that and take a balanced view of whats good for the nation in the long haul.
Are the rich really better off living in gated communities surrounded by millions of embittered unemployed whose only solace is drugs.
This is a particularly damaging subsidy especially when its practiced actively, for example the case where the Chinese government goes around to foreign companies and says manufacture here and we'll subsidize your entire operation. Many of these are highly automated companies where the labor factor is insignificant. Most private run companies that are entirely focused on profits cannot say no to such a deal.
This wouldn't be a problem if these companies were simply building products only for the Chinese market, but as it usually turns out these companies already have established foreign markets and end up exporting nearly all their product. So much for China's claim to not be seeking trade surpluses.
It makes me wonder why this issue hasn't been targeted directly rather than just beating up on currency; too many vested American companies staying quiet and happily taking advantage of the situation? Without a forceful policy to dislodge our own companies from this game we stand to continue down the path of de-industrialization until we rearch 3rd world status.
The west has done the opposite. They have handed out free trade agreements like confetti (its not just china).They have traded the power of their consumer dollars and received sly amused contempt in return.
Huge chunks of entire cities and classes have been thrown on the scrapheap.
Detroit (bad example (US cars had it coming - they never competed globally) but ford seems to be doing ok) - was a city of ~2m+ - now ~800k (& all of em have a sad story) . How sad, once a global powerhouse (perhaps the savior of the free world in ww2), now a virtual ghost town. Cities can reinvent & recycle their infrastructure, but not when their decline is so sudden.
They have focused on making ordinary lives better, we have made them worse.
The theory of comparative advantage (free trade) relies on some deeply flawed assumptions, such as perfect mobility of labor.
Trade war will be nasty as they have left us vulnerable. Many industries no longer exist and china holds a very big IOU from the US. But appeasment wont work. The trade war is happeninjg now, we just are not fighting back. The chinese talk of social unrest if they float the yuan. At least they can go back to the farm. What can americans do?
America comes out the overwhelming winner in the balance of Profits. Each year, 57,000 American businesses are reporting $80 Billion in profits (this is after paying American wages, and the real numbers are likely much higher in view of transfer pricing). In contrast, the profits are slim (1-5%) on the exports from China (thus a max of $15 Billion on the $300B total).
If there is anything unfair, it would be that a much richer America gets to keep $80 Billion in profits vs. China's $15B.
American businesses TODAY have record profits, even in the midst of a recession for the workers. The companies collectively sit on $2 Trillion in CASH, almost as much as what it took China 30 years to accumulate in reserves.
The fact that Washington allows the rich to keep everything (income of top 1% rose from 9% in 1970 to over 25% today), is uniquely an American issue, and has nothing to do with China.
The weak RMB by itself, as well as China's low consumption figures relative to overall GDP, is testament enough to how much China's monetary policy enforces inequality and the transfer of wealth from households to industries.
Most of China's poverty reduction occurred between the 1970s and 1989, when economic reform was not primarily state-driven. In the aftermath of Tianenmen and the Southern Tour, however, the state now is the engine of the economy. Accordingly, almost all of China's recent GDP growth has come from fixed assets investment and loose monetary policy that benefits state-owned enterprises. The real estate bubble is a case in point: how does the average Chinese (making 3000-4000 USD per annum) benefit from vacant properties that they could not buy with a decade's worth of personal income? The construction of said properties, however, adds to GDP and benefits construction firms and local governments aiming to hit growth targets.
China's work force is never going to be larger than it is right now: the 30-year demographic boom is over, and it now must pursue increased productivity and consumption. Also: it's not a matter of "going back to the farm." It's a matter of unrest by millions of relatively poor workers witnessing the collapse of vital industries.
If the Chicoms are really so incompetent and arbitrary, these things just happen by themselves?
i think the posse knows it would be shooting itself in the foot ----imported goods will cost more -----do they really want to import inflation
in the US 50 states use the same currency -----ie each state is "pegged" to the other -----if one state tried to devalue "their " dollar to gain advantage they would be manipulators
the game here is to offset chinas cost of labor with a high currency and in the process ease the US debt burden by paying 50 cents on the dollar -------
China has implemented policies in the form of mandates to replace foreign technology in such core infrastructure as banking and telecomm systems.
What happens is that instead of first (silently?) building up a consensus (which would surely mean the US will not get 100 percent of what they want to achieve), they - again - simply act. In presently unilaterally depreciating the USD, they alienate the EU and Brazil (just to name two) and will limit the will and the capacity to support US policy.
Secondly, I think the public (or media) approach is counter- intuitive: Requiered is a sustainable, peaceful solution. If so, one can't publically blame the partner, dictating steps he has to take. At least not if one hasn't the means to really push it. We just saw the IMF meeting and will see the G20 summit in Q4. Why not maintain a low profile and try to diplomatically solve the issues there and then first? Would it have been so hard to remain silent or diplomatical on the issue at least until after the G20 summit? What does the US really expect the Chinese to do now? If they now give in, they'll look weak domestically. Now, I guess, the political price tag to achieve economic balance just became higher.
Article makes good point though: China's policy disadvantages all currencies, not just the dollar.
China is not picking on the US, and the US is no more hurt by the low yuan than any other country.
Including the Euro. The dollar is artificially strong now due to meltdown, that is changing.
The EU is China's largest trading partner, not US, and soon Brazil will be. Yet Germany has a trade and budget surplus. How do they do it? Answer: great German engineering, reasonably paid CEOs and stockholders, instead of whining and pointing fingers at the Chinese. We should try same.
Other "Third-World" nations have asked the IMF for help, Mr. Geithner. Generally it has resulted in massive street riots. The Chinese politburo is unmoved by your incessant whining, and their friends on Wall Street, who you are intimately familiar with, see no reason to back up the American economy over their most profitable friends. "You" FAILED, Mr. Geithner....and now its time to seriously 'devalue' the dollar for your failure, because everyone in the world knows where this started. They just don't know where it going to end....
http://www.arabianmoney.net/us-dollar/2010/10/10/stay-out-of-this-bond-market-madness/
Technology has allowed the human race to reach unimaginable level of potential productivity, yet we have been brainwashed to accept that we're all bad and it makes sense we're drowning in crippling debt. Of course when every dollar created is created as debt, there is no other possible result than for everyone to become the indentured servants of the banks, Even if you don't borrow, as a taxpayer, you have no choice, and neither do your kids. END DEBT-BASED MONEY CREATION FOR THE PROFIT OF PRIVATE BANKS.