Toshio Matsuda, Commentator & Intl Economist
Straight from the Shoulder
Official Website : http://www.chokugen.com/e/
E-mail : masuda@sunraworld.com
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US-China economic tensions?
The US has continued to push China toward floating the Chinese Yuan which would result in the currency appreciating by 30 to 40%. But this hasn’t happened yet. Last year the US trade deficit with China reached $23.3bln and the deficit in the second quarter of this year ballooned to $4.64bln, twice the level it was in the same quarter of the previous year. On the US side of the argument, many U.S. corporations and some members of Congress believe that the unreasonable manipulation of the Chinese Yuan results in both manufacturing and agricultural job losses as well as retards wage rates in these two economic sectors.
Underlying this view is the strong dissatisfaction in the US Congress regarding the White House’s stance towards China. Congress has continued to apply pressure on the Bush Administration saying that if the administration won’t do it, Congress will. As a result, two complaints have been filed against China at the WTO, one regarding steel in February and the other on intellectual property rights filed in April. In initial discussions held last December, China promised to resolve the disputes through dialogue, but claimed that the recent call for sanctions in the WTO complaints was in violation of this agreement and that it was ready to stand up and face the challenge head on. Since the beginning of this year, the mood between the two countries has begun to turn sour.
For the Chinese, since the US is its largest trading partner, few would look favorably upon the government if these issues were allowed to aggravate matters. Thus, the Chinese government has sent fourteen ministers, or half of the cabinet, to the US for meetings this week. Obviously, the Chinese view these meetings very seriously. This US-China conference is rendered more difficult by the fact that while all assertions and actions from the Chinese side are unified decisions coming from the Communist party as a whole, the American side is much more complex. There are so many voices in the mix; people representing companies forced into bankruptcy by cheap imports from China, apparel factory workers who have lost their jobs, farmers who claim that the market has been spoiled by cheap contaminated vegetables, China bashers looking to boost their performance ahead of the election, or importers and retailers who secretly welcome any expansion in Chinese imports.
So what about the Federal Reserve Board? With the inflationary trend continuing on the back of the surge in crude oil prices, surely Chinese imports serve to bring down prices. So, however one looks at it, it is hard to see just what exactly the US as a whole wants from China. On the other hand, the number of people criticizing the Chinese economy is growing each day and anti-Chinese sentiment is rising. Take the issue of intellectual property rights: even if bona fide DVDs produced by the Hollywood movie studios were sold in China, they are expensive and people can not afford them. That’s why the pirate editions fly off the shelves. The Chinese wonder whether procuring goods from China at extremely low prices and then selling them in the US for many times that price isn’t contrary to the interests of the US. The Chinese also believe that their exports to the US actually help to significantly expand the US economy.
China states its case even more adamantly. While the exchange rate band for the Yuan has been set at 0.3% since July 2005 (going up to 0.5% from May 18, 2007), there hasn’t been a single day when the Yuan has appreciated by the maximum 0.3%. The US criticizes China because the Yuan has only appreciated 7% in the past 2 years, but the Chinese authorities have intervened to support the dollar. If China had not intervened to buy dollars then the cost of crude oil would have gone up as the dollar weakened, resulting in a US economy sliding toward a recession, yet facing higher prices. The Yuan exchange rate band has now been expanded to 0.5% and that will mean that the volume of dollar buying will increase; so what is bad about this for the US? Surely China is ultimately contributing to US consumption that makes up over 70% of GDP.
There are some signs that the US economy is weakening. Would it be alright for the US economy to slip into recession if US imports from China fall dramatically due to the Yuan’s appreciation, resulting in rising prices, falling consumption and a decline in GDP? And, what is more, isn’t China the US’s biggest export market?
At the US-China Strategic Economic Dialogue held in Beijing last December on the issue of currency intervention, a decision was made to establish new offices in Beijing for the New York Stock Exchange and the NASDAQ with the aim of freeing up more money and developing a system whereby funds could flow directly from the Chinese market to the US according to market principles.
If a revaluation of the Chinese Yuan was actually to take place and the Yuan appreciated by as much as 40%, then surely it would not be China, but rather the US that would feel the catastrophic effects on its economy. The Democrats shout loud criticism about the US-China trade imbalance, but surely the working poor and middle class for whom they advocate would not be happy if they were not able to buy the inexpensive every day goods from China that they have come to rely upon. Just walk into any Wal-mart and check the clothing labels to see where they are manufactured. The US continues to issue huge amounts of dollars to finance its foreign debt which in turn feeds its trade deficit. But which countries are buying those dollars and supporting the dollar at a high level?
In other words, however high the US-trade deficit with China becomes, as long as China continues to buy dollars to support it, then is there a real need to make a big fuss about the imbalance of the US-China trade account or a Yuan revaluation?.
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