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 Suddenly, China rescinded its restriction on rare earth exports to Japan and released three of the four imprisoned Japanese nationals, ending the dispute one captive ahead of Japan.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.
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