from Follow the Money

Tim Adams of the US Treasury has a sophisticated China policy but …

November 24, 2005

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the tone of this Economist article (particularly in the last few paragraphs) seemed a bit off - though it is far better than the Economist's leader, which somehow fails to assign any responsibility to China for the current imbalanced world.
  
The overarching theme of the article seemed to be that the only real problem in the Sino-American economic relationship is that a China-bashing US Congress may violate the WTO rules and impose unilateral tariffs on China. 
 
This framing strikes me as a bit narrow.  While sustained Chinese intervention to resist renminbi appreciation doesn't formally violate China's WTO commitments - best I can tell, the WTO is basically silent on exchange rates -- China also is acting in ways that are sure to lead to challenges to the WTO's silence on exchange rate regimes.   

The article does note China's large and growing current account surplus and its surging reserves, but it then argues this is a problem because not because it is hard for countries with large current account deficits to bring those deficit down so long as the surpluses of surplus countries are growing, but because it "gives ammunition to protectionist in Congress."   
 
The only "legitimate and unaddressed" concern listed in the article is China's tolerance for "intellectual property theft."   Yet somehow, I suspect China's willingness to add $275 billion to its reserves, 15% of its GDP this year has a bigger impact on the global economy than Chinese counterfeiting.  
 
Don't get me wrong.  Congressional protectionism (spurred on by election year pressures) certainly is a risk.  And the current Treasury Under Secretary Tim Adams is right to argue that China's peg is a barrier to global adjustment, it should be of global concern, and the IMF is in principle the right forum for addressing concerns about exchange policies that impede global adjustment.  Too bad that the IMF currently seems unwilling to exercise real multilateral surveillance over exchange rate regimes. 
 
At the same time, Congressional protectionism is not just emerging out of the ether either.  Congressional protectionism is an entirely predictable result of a fundamentally unbalanced economic relationship.   Fred Bergsten is right about this.
 
China is no longer a small player in the world trading system - by 2007, if not before, it will be the world's largest exporter of goods.  Yet large exporters of manufactured goods generally have not spent 10% of their GDP or more intervening in the currency markets to prevent their currency from appreciating.   China has now done that for three years or so - and looks set to do so again in 2006.  
 
Most countries that subsidize their exports do so "on budget," through export financing agencies and the like.  China is the first major manufacturing power to do on a consistent sustained basis "off-budget," through the central bank.   Yes, Japan has intervened heavily too - but never on quite this scale relative to its GDP.
 
Chinese intervention is having a major impact on China's economy.  Countries with massive economic booms usually see their currencies rise in value, in real terms through higher inflation if not in nominal terms.  Not China.  Its currency has depreciated in real terms since 2002, despite a massive domestic property boom.   Countries that successfully attract tons of foreign direct investment usually experience a currency appreciation and run current account deficits.  Not China.   It is rather unusual for a country's current account surplus to grow amid an investment boom ...

There certainly is a risk that the US Congress will unilaterally rewrite the terms of China's WTO accession.  But China has rewritten the informal norms governing exchange rate intervention over the past few years as well - and most actions invite a counter-reaction.  
 
There are also plenty of causes (in my view) for concern that don't boil down to protectionism.  Taking on external debt to finance a residential housing boom for example, seems to pose a bit of a risk -- since houses won't generate the external receipts needed to pay off that debt.  And I would think Chinese policy makers would be concerned about China's (growing) exposure to a global slowdown - a direct consequence of the fact that China's economy now relies so heavily on external demand to make up for shortage of domestic demand. 
 
Of course, not everyone thinks China's currency regime plays as big a role in sustaining global imbalances as I do -- and I strongly suspect at least one of the authors of the Economist article does care deeply about global imbalances. 
 
Still, China's challenge to the global norms governing currency intervention by major players in the world trading system seems to me to be a bigger issue than China's violations of intellectual property.  And I even suspect that figuring out the norms governing currency intervention will be more important to the evolution of the global trading system than anything now being negotiated as part of the Doha round ... 
 
One final caveat, just to avoid misunderstanding.  I certainly think America's current account deficit reflects American policy choices as well as policy choices in China.   I just don't think America's savings shortage can entirely be divorced from the willingness of China's central bank (and others) to finance the US - since the easy availability of credit reduces the pressure for the US government to adjust its policies, and for US households to adjust their behavior.     

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