What is truly remarkable about two comments in the last two days in the august Financial Times, is that they both say protectionism against China is likely. One actually urges it, the other pretty much says it’s a-comin’ unless China mends its ways. And both pieces were written by reputable economists, the last people you’d expect to be talking about trade barriers as a last ditch option.
But as the articles suggest, China’s intransigence has gone so far that a pushback is inevitable unless something gives, and China has signaled that it has no intention of blinking.
The overly cheap peg for the renminbi is tantamount to having both large export subsidies and substantial tariffs in place. Even though China’s partners have various favored industries here and there, the scope and scale of these interventions pale next to what China achieves through its currency manipulation. Of course, the US has aided and abetted this practice by being unwilling to call China a currency manipulator long ago, before they got so deeply hooked on massive exports and the US became addicted to cheap capital.
But as the sabre-rattling from Robert Aliber yesterday and Martin Wolf today suggests (hat tip reader Michael), relationships come under serious stress in bad times. Yet China seems determined to repeat the mistakes of the US with Smoot Hawley in a different form. China maintaining its peg against the dollar has bettered its position against other exporters (witness the collapse in the Japanese trade surplus in particular) and the US needs the dollar to fall relative to the RMB (as in that is our biggest imbalance, ergo, that is where the adjustment most needs to occur). Aliber puts it bluntly:
Beijing’s unprecedented accumulation of $2bn (€1.4bn, £1.2bn) of US dollar securities is the product of its “beggar-thy-neighbour” policy in importing jobs. The undervaluation of the renminbi has the same impact as an import tariff of 50 or 60 per cent.
A principal motive for the cheap renminbi policy is Beijing’s concern that domestic unemployment will increase if the currency strengthens….
China’s large holdings of US securities have enhanced its political clout and given it the standing to comment on US interest rates and the US fiscal deficit. And as long as China’s trading partners are focused on the huge trade surplus, their other demands on Beijing are modest.
Americans have been patient – too patient – in accepting the loss of several million US manufacturing jobs because of China’s determined pursuit of mindless mercantilist policies…The US can help China make the necessary adjustments toward a reduction in imbalances by adopting a uniform tariff of 10 per cent on all Chinese imports, based on their values when they enter the US. Six months after the establishment of this tariff, the rate would increase by one percentage point a month until the Chinese trade surplus with the US declines to $5bn a month.
The precedent is clear. In August 1971 the US adopted a 10 per cent tariff on dutiable imports to induce Japan and several European countries to allow their currencies to float. The measure quickly accomplished its goal – the European countries stopped pegging their currencies immediately and the Japanese allowed the yen to float a week later. The tariff was eliminated after a few months….
It should not take long for the Chinese to learn that they are much more dependent on access to the US market than Americans are dependent on Chinese goods. Virtually all of the goods that the US imports from China could be sourced at home or in Indonesia, the Philippines or South Korea. China would find it difficult to find other foreign markets for the goods that it no longer sold in the US…. Such an initiative by the Obama administration would be much more significant as a jobs-creation measure than anything else it could adopt.
Yves here. I guarantee this will never happen under Obama. Nixon, for all his faults, had balls. Obama does not.
Martin Wolf is far more measured but just as troubled:
Wen Jiabao, the Chinese premier, complained about demands for Beijing to allow its currency to appreciate. He protested that “some countries on the one hand want the renminbi to appreciate, but on the other hand engage in brazen trade protectionism against China. This is unfair. Their measures are a restriction on China’s development.” …
We can make four obvious replies to Mr Wen. First, whatever the Chinese may feel, the degree of protectionism directed at their exports has been astonishingly small, given the depth of the recession. Second, the policy of keeping the exchange rate down is equivalent to an export subsidy and tariff, at a uniform rate – in other words, to protectionism. Third, having accumulated $2,273bn in foreign currency reserves by September, China has kept its exchange rate down, to a degree unmatched in world economic history. Finally, China has, as a result, distorted its own economy and that of the rest of the world. Its real exchange rate is, for example, no higher than in early 1998 and has depreciated by 12 per cent over the past seven months, even though China has the world’s fastest-growing economy and largest current account surplus…..
Unfortunately, as we have also long known, two classes of countries are immune to external pressure to change policies that affect global “imbalances”: one is the issuer of the world’s key currency; and the other consists of the surplus countries. Thus, the present stalemate might continue for some time. But the dangers this would create are also evident: if, for example, China’s current account surplus were to rise towards 10 per cent of GDP once again, the country’s surplus could be $800bn (€543bn, £491bn), in today’s dollars, by 2018. Who might absorb such sums? US households are broken on the wheel of debt, as are those of most of the other countries that ran large current account deficits. That is why governments are now borrowers of last resort.
Yves here. Did you catch that, sports fans? The US will not be able to deleverage (absent explicit default) unless we move to a trade surplus. As long as we run a current account deficit, we need to run a capital account surplus. That means (if the deficit and therefore corresponding surplus are more than trivial) rising levels of debt, and high odds of speculative asset bubbles. As Wolf warns:
China’s exchange rate regime and structural policies are, indeed, of concern to the world. So, too, are the policies of other significant powers. What would happen if the deficit countries did slash spending relative to incomes while their trading partners were determined to sustain their own excess of output over incomes and export the difference? Answer: a depression. What would happen if deficit countries sustained domestic demand with massive and open-ended fiscal deficits? Answer: a wave of fiscal crises.
Neither answer is acceptable; we need co-operative adjustment. Without it, protectionism in deficit countries is inevitable. We are watching a slow-motion train wreck. We must stop it before it is too late.
This looks like it will get a lot worse before it gets better….and I hope I am proven wrong on this one.