Administration Steps Up Saber Rattling with China

Let’s see….early in the days of this Administration, Treasury Secretary Geithner said some pretty critical things about China. The Chinese threw a big temper tantrum and Geithner backed down. He had tended to try to play down tensions with China over its mercantilist policies (the most important being pegging its currency at an artificially low rate) until last April, when it seemed as if the Treasury might do the heretofore unthinkable and certify China a currency manipulator. But then, China blindsided the US by announcing that it was going to move towards a more market oriented currency policy, with no timetable announced. Pretty much everyone took this to be a big deal; we called it to be a headfake, which it has proven to be. The reminbi has barely budged versus the dollar, which means it has actually fallen on a trade-weighted basis, the opposite of what you’d see if it was actually liberalizing its currency policies.

Geithner is actually sounding serious, but in this game of chicken, he really, really wants China to blink. However, the Chinese do not seem to be reverting to their usual displays of pique, and they were so obliging as to bump up the value of the renminbi a tad.

It isn’t clear at all how far Team Obama is willing to go in pushing China. They’ve been remarkably passive in dealing with high unemployment; Reagan was far more active. The midterm elections give them more cover with the Chinese (they can say, plausibly, that domestic politics demand some concrete steps from China). But the spate of Tea Party primary wins is one of the few things that might galvanize otherwise disillusioned Democrats into turning out in November. And if the Administration believes this to be the case, they may settle for some face gestures from China in lieu of real action.

From Bloomberg:

“The pace of appreciation has been too slow and the extent of appreciation too limited,” Geithner said in testimony prepared for a congressional hearing today. “We are examining the important question of what mix of tools, those available to the United States and multilateral approaches, might help encourage the Chinese authorities to move more quickly.”

Geithner’s comments, his strongest since he took office in January 2009, highlight growing frustration among American officials with policies they say put American companies at a competitive disadvantage. The U.S. yesterday filed a pair of complaints against its second-largest trading partner with the World Trade Organization, and lawmakers facing elections in November are introducing measures allowing companies to pursue sanctions against China for its currency stance….

Geithner said China’s currency stance has created a “major distortion” in the global economy that is having a “negative impact” on the U.S. He said appreciation of the yuan would help with economic rebalancing, while not erasing the U.S. trade deficit with China.

He called on China to adjust its exchange rate and make a slate of other structural reforms to policies on interest rates, energy prices and service-sector investment. Geithner pledged the U.S. would “aggressively” pursue trade remedies, such as yesterday’s WTO complaints on electronic payment services and steel exports.

Note that branding China a currency manipulator would then allow the US to impose sanctions, which is certain to lead to a response from China (they’ve taken a tit for tat strategy in response to past salvos). But China is pointedly refusing to back down on other disputes. From the Financial Times:

Anshan Iron and Steel is pressing ahead with a controversial US investment in the face of strong opposition in Congress and by industry associations.

The Chinese state-owned group will buy a 14 per cent stake in privately-owned Steel Development and join the board of directors, the companies announced on Wednesday, without disclosing how much Anshan would pay for the stake.

The other equity partners in Steel Development have not been disclosed, but John Correnti, its chief executive, said they were “all American” and included himself.

Steel Development is building a $168m reinforcing bar mill in Amory, Mississippi and plans to build four more mills after that. The investment has been heavily criticized by members of the Congressional Steel Caucus, who issued a letter in July urging the government to investigate the deal on national security grounds.

The investment is relatively small but it is nonetheless symbolic when Beijing has been increasingly vocal with complaints about the antagonism towards Chinese companies in the US.

That congressional letter warned that the deal would “allow a Chinese company to exploit the American steel market” and access new steel technologies.

While the US wants a concession from China. this dispute could veer off in unexpected directions if neihter side backs down.

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  1. purple

    It’s inevitable that China will begin taking stakes in US firms, one can’t expect them to put their dollars in treasuries or Tar Sands forever. Money talks and will eventually trump national security or push it hard against the wall. That is, if the current imbalances continue.

    1. MyLessThanPrimeBeef

      And thanks to the Supreme Court, corporations, foreign or domestic I understand, are now able to make campaign contributions. It’s probably more rewarding than putting trade surpluses in Treasuries.

      1. psychohistorian

        My view of this is that the corporations represent the rich and the Chinese government represents ???? but I suspect, not really the world’s rich.

        Others view?

        1. hix

          You might suspect wrong. The Chinese rich and they have quite a few of those now since inequality is very high there are all wellconnected with the communist party, either children of high ranking party members or high ranking party members themself.

  2. Expat

    Greece won’t default, restructure or get new EU funds.

    Instead Greece will Institute Reconductive Re-apportionment of Allocations for Outstanding Financial Instrumentational Reimbursement. Or perhaps Temporary Divergeance Policy from Normative Obligatory Monetary Scheduling. And finally, Inter-European Cultural Exchange and Recapitalization Program for the Augmentation of Southern European MacroEconomic Feasability Guarantee Programs.

    See, no default, no restructuring, no new money.

    Rally! Rally! Rally!

  3. Glen

    Geithner get tough with China? Wall St’s lap dog?

    That’s like (as they say in my neck of the woods) asking my cat to cut, spilt, and stack wood. It just ain’t gonna happen.

  4. Gary Anderson

    Two things:

    1. We have mercantile industries too. Finance and military come to mind. We export debt, credit, and war. Those protected industries will probably try to destroy the world at some point.

    2. Palin and Beck believe in holy war. I can’t see how that will balance a budget anytime soon. That is why Ron Paul told the Tea Party faithful that Palin/Beck were taking them for a ride.

    3. If the Tea Party/John Birch Society (Koch and sons, google it) comes to power, nuclear war with Russia could very well happen. Tell your friends.

    I heard Eagleberger on Kudlow a few weeks ago saying he expected a few nuclear lobs between the US and Russia. These crazy wackos that make up most of the Republican right, Paul excluded, need to be exposed.

  5. rd

    TurboTax Timmy can get tough now because he doesn’t need to worry about finding buyers for Treasuries anymore – Basel III may have looked after that:

    They are also starting to figure out that it is really hard to reduce unemployment if the goods that people buy come from overseas sources.

    I did the find the squeals of indignation from China about Japan’s manipulation of the Yen to be quite amusing – virtually Onion-like headlines.

    I also recall that the Japanese were going to own all of the United States by 1990. My suspicion is that there are enough internal discontinuities in China’s economy that eventually we will find out it is not quite the irresistable juggernaut that it is made out to be. If we think our politicians in the US are concerned about the social impacts of unemployment, their seats aren’t even lukewarm compared to the hot seats that the Chineses leadership is in regarding employment.

  6. Tao Jonesing

    “While the US wants a concession from China, this dispute could veer off in unexpected directions if neither side backs down.”

    No worries. This is the Obama administrtion we’re talking about. They will backdown, settle for something less than the status quo and declare victory.

  7. maniam

    “…Note that branding China a currency manipulator would then allow the US to impose sanctions,…”

    what about the following?
    re:Japan’s Move on Yen Lacks Global Support-nyt-15 sept 2010.
    “We conducted a currency intervention to check excessive volatility in currency markets,” Yoshihiko Noda, the finance minister, said Wednesday. “We will continue to watch currency market moves and take decisive steps if necessary, including intervention.”

    but japan is a staunch ally.

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