In the 1980s, when unemployment hit 8%, Ronald Reagan’s administration was concerned and took steps to address the problem. One of the causes had been the 60% increase in the dollar versus the yen, which allowed the Japanese to make deep inroads into the US. One of the responses was the so-called Plaza Accord, in which the G-5 engaged in coordinated intervention to drive the dollar down. Narrowly, they succeeded too well, since the dollar overshot on the downside. More broadly, the measure was a partial remedy. US imports from Japan did fall markedly, but US companies did not increase their penetration of Japanese markets as hoped (due to so-called “structural barriers”, meaning all sorts of non-tariff impediments the Japanese used to make life miserable for exporters, plus a very strong prejudice among Japanese consumers against foreign goods).
China is an equally tough minded mercantilist, and has played the US adeptly thus far, managing to blunt the pressure from the US for it to allow its currency, the renminbi, to appreciate (as we noted at the time, its announcement that it would further liberalize its currency policy was a headfake designed to placate the US. Note some economists question whether allowing the currency to rise will do much to alleviate the bilateral US-China trade imbalance, but the flip side is if not, why is China so loath to allow the currency to appreciate?)
The announcement today, that China’s trade surplus reached a whopping $28.7 billion, 170% higher than its year-ago level and well above analysts’ estimates, is sure to increase pressure on China to Do Something about its currency. If China does not act, and the deficit next month is ugly, expect protectionist sabre rattling, and perhaps shots across the bow, like more imposition of targeted tariffs, to result.
With mid-term elections in the U.S. due in November, today’s numbers may provide lawmakers with fuel to increase demands for the Obama Administration to take action against China, which they claim is deliberately keeping its currency undervalued to give exporters an unfair advantage.
A U.S. jobless rate still close to 10 percent may prompt “people in Washington to say China needs to do more to get its trade surplus down and that would involve a stronger currency,” said Brian Jackson, a Hong Kong-based emerging-markets strategist at Royal Bank of Canada.
China’s trade surplus with the U.S. rose 10 percent to $93 billion in the first five months of 2010, according to the American Commerce Department. China’s customs bureau puts the gap at $59.4 billion, 18 percent higher than a year earlier.
Democratic Representative Brad Sherman unveiled a proposal on Aug. 4 calling for China’s permanent normal trade relations status, which lowers U.S. duties on its imports, to be revoked, Agence France-Presse reported.
From the Financial Times:
Earlier in the year, Beijing was able to point to a series of much smaller monthly surpluses – and a trade deficit in March – as evidence that the economy was already rebalancing and was much less dependent on exports. However the figures over the last three months suggest that the surplus in the second half of the year is likely to be much larger.
Yet the slowdown in import growth in China could also be a reflection of a significant cooling in the domestic economy, which would make policymakers in Beijing more reluctant to strengthen the currency sharply.
“The two developments will only add to Washington’s insistence on a stronger renminbi and to Beijing’s resistance,” said Ben Simpfendorfer, an economist at Royal Bank of Scotland in Hong Kong. This could lead to a new push in the US Congress to pass measures penalising Chinese exports, especially as the November mid-term elections approach.