As a senator and candidate for president, Barack Obama urged the US to take a tough stand against China over its foreign exchange system.
But more than a year since taking office, Obama’s administration is still weighing whether to launch formal action over the yuan in what could be the biggest - and riskiest - challenge by Washington to Beijing’s economic policies.
Although there is agreement among Western economists that the yuan is substantially undervalued, labelling China a currency manipulator could backfire on the United States, making it unlikely Obama will take that step soon.
“The Chinese might react quite badly to that. Maybe eventually the US may have to do it. But the question is whether it can do some things in the meantime to ensure it has more friends on its side,” said Arvind Subramanian, a senior fellow at the Peterson Institute for International Economics.
Obama brought concerns about China’s exchange rate back to the top of the US economic agenda last week when he said countries that undervalue their currency put the US at a huge competitive disadvantage.
The Peterson Institute, a Washington-based think tank, estimates the yuan is undervalued by as much as 25 per cent to 40 per cent, effectively subsidising China’s exports and taxing its imports at the expense of other countries.
China says its currency policy is an internal matter, driven mainly by the need to maintain rapid economic growth and provide jobs. It has held the yuan at about 6.83 to the US dollar since July 2008.
Obama’s comments have focused attention on whether he will formally label China as a currency manipulator in a semi-annual Treasury Department report due on April 15, a move that would likely inflame bilateral relations with China.
US-China ties already have been put to the test recently over Washington’s plan to sell about US$6.4 billion of arms to Taiwan, Google’s threat to quit China over censorship and hacking concerns and an expanding list of trade disputes.
Meanwhile, the United States needs China’s co-operation to rein in Iran’s nuclear programme, “a high-voltage foreign policy and security issue,” said Ed Gresser, trade policy director at the Democratic Leadership Council.
China is also the biggest creditor of the US. Senior Chinese military officers, in an interview published on Monday, urged their country to sell some US bonds to punish Washington for the planned arms sales to Taiwan.
Rather than act on his own, many believe Obama should enlist support from key emerging economies, like Brazil, India, Mexico and Turkey, that compete with China for exports and also suffer from its currency regime.
“I think there is concern about China’s currency practice around the world. Why not tap into that?” Subramanian said. The US cannot succeed if it acts unilaterally, he said, because China will not tolerate being seen as giving into pressure from its main rival for superpower status.
China, as a member of the Group of 20 leading industrialised and developing countries, has pledged to help address imbalances that have long plagued the global economy.
“The US should certainly continue its engagement with China ... but unilateral coercive measures would seem at odds with that agreed G20 plan and could well prove counterproductive,” said Daniel Price, a lawyer at Sidley Austin who worked on trade in the White House under former president George W. Bush.
Washington’s angst over value of the yuan goes back to at least 2002, when the US trade deficit with China first topped US$100 billion. Data released on Wednesday showed the trade gap with China narrowed 15 per cent last year to US$226.8 billion but was still the largest US trade deficit with any country.
Democrats hammered Bush for years over his handling of US policy towards the yuan. Those critics included Obama, who signed a petition in 2005 asking Bush to seek permission from the World Trade Organisation to file sanctions against China if it did not revalue the yuan by up to 40 per cent.
Bush refused, saying the US would have better luck persuading China to reform through diplomacy. In mid-2005, China did make some changes that allowed its currency to strengthen about 19 per cent over the next several years.
But a WTO case was still on the minds of some Democratic and Republican senators in March last year when they weighed Ron Kirk’s nomination to be US Trade Representative.
Kirk resisted taking a firm stand but promised the administration would “review China’s actions for consistency with its WTO obligations” and would pursue a case if that was the most effective means to address US concerns.
US trade officials said this week they were still reviewing the possibility of filing a case. But Gresser said he doubted that would happen.
“The WTO doesn’t have a formal agreement about currency. I think it would be a very difficult case to make. And if you lose, you would have kind of a validation of the Chinese currency system,” he said.
But if Obama does not label China a currency manipulator, union officials say he could face the same petition he signed in 2005.
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On yuan, Obama has to tread cautiously
Reuters
12 February 2010
As a senator and candidate for president, Barack Obama urged the US to take a tough stand against China over its foreign exchange system.
But more than a year since taking office, Obama’s administration is still weighing whether to launch formal action over the yuan in what could be the biggest - and riskiest - challenge by Washington to Beijing’s economic policies.
Although there is agreement among Western economists that the yuan is substantially undervalued, labelling China a currency manipulator could backfire on the United States, making it unlikely Obama will take that step soon.
“The Chinese might react quite badly to that. Maybe eventually the US may have to do it. But the question is whether it can do some things in the meantime to ensure it has more friends on its side,” said Arvind Subramanian, a senior fellow at the Peterson Institute for International Economics.
Obama brought concerns about China’s exchange rate back to the top of the US economic agenda last week when he said countries that undervalue their currency put the US at a huge competitive disadvantage.
The Peterson Institute, a Washington-based think tank, estimates the yuan is undervalued by as much as 25 per cent to 40 per cent, effectively subsidising China’s exports and taxing its imports at the expense of other countries.
China says its currency policy is an internal matter, driven mainly by the need to maintain rapid economic growth and provide jobs. It has held the yuan at about 6.83 to the US dollar since July 2008.
Obama’s comments have focused attention on whether he will formally label China as a currency manipulator in a semi-annual Treasury Department report due on April 15, a move that would likely inflame bilateral relations with China.
US-China ties already have been put to the test recently over Washington’s plan to sell about US$6.4 billion of arms to Taiwan, Google’s threat to quit China over censorship and hacking concerns and an expanding list of trade disputes.
Meanwhile, the United States needs China’s co-operation to rein in Iran’s nuclear programme, “a high-voltage foreign policy and security issue,” said Ed Gresser, trade policy director at the Democratic Leadership Council.
China is also the biggest creditor of the US. Senior Chinese military officers, in an interview published on Monday, urged their country to sell some US bonds to punish Washington for the planned arms sales to Taiwan.
Rather than act on his own, many believe Obama should enlist support from key emerging economies, like Brazil, India, Mexico and Turkey, that compete with China for exports and also suffer from its currency regime.
“I think there is concern about China’s currency practice around the world. Why not tap into that?” Subramanian said. The US cannot succeed if it acts unilaterally, he said, because China will not tolerate being seen as giving into pressure from its main rival for superpower status.
China, as a member of the Group of 20 leading industrialised and developing countries, has pledged to help address imbalances that have long plagued the global economy.
“The US should certainly continue its engagement with China ... but unilateral coercive measures would seem at odds with that agreed G20 plan and could well prove counterproductive,” said Daniel Price, a lawyer at Sidley Austin who worked on trade in the White House under former president George W. Bush.
Washington’s angst over value of the yuan goes back to at least 2002, when the US trade deficit with China first topped US$100 billion. Data released on Wednesday showed the trade gap with China narrowed 15 per cent last year to US$226.8 billion but was still the largest US trade deficit with any country.
Democrats hammered Bush for years over his handling of US policy towards the yuan. Those critics included Obama, who signed a petition in 2005 asking Bush to seek permission from the World Trade Organisation to file sanctions against China if it did not revalue the yuan by up to 40 per cent.
Bush refused, saying the US would have better luck persuading China to reform through diplomacy. In mid-2005, China did make some changes that allowed its currency to strengthen about 19 per cent over the next several years.
But a WTO case was still on the minds of some Democratic and Republican senators in March last year when they weighed Ron Kirk’s nomination to be US Trade Representative.
Kirk resisted taking a firm stand but promised the administration would “review China’s actions for consistency with its WTO obligations” and would pursue a case if that was the most effective means to address US concerns.
US trade officials said this week they were still reviewing the possibility of filing a case. But Gresser said he doubted that would happen.
“The WTO doesn’t have a formal agreement about currency. I think it would be a very difficult case to make. And if you lose, you would have kind of a validation of the Chinese currency system,” he said.
But if Obama does not label China a currency manipulator, union officials say he could face the same petition he signed in 2005.
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