March 13, 2010
The US Treasury, in its semi-annual report delivered every April and October, can formally label China as a “currency manipulator” on account of the yuan’s substantial undervalue. This would allow the Department of Commerce to impose countervailing duties on a wide range of Chinese products.
US Treasury Secretary-designate Timothy Geithner told the Senate Finance Committee at his confirmation hearing in January that the currency remained a serious concern: “I do believe it is a significant issue.”
Congressional critics and others argue that this currency manipulation is a major contributor to global trade imbalances. Nobel Prize-winning economist Paul Krugman said that global economic growth would be about 1.5% higher if China stopped restraining the value of its currency and running trade surpluses. “We should not be afraid of what the Chinese might do if we pressure them to stop this currency manipulation,” Krugman said.
Krugman advocates the US taking a tough line with China. “Without a credible threat, we’re not going to get anywhere,” he said. “The chance that we would trigger a trade war is very small and it’s hard to see any alternative.”
Not all economists agree that the revaluation of the yuan would substantially spur global economic growth. But assuming this to be true, China will only act if it considers a revaluation to be in its own interests and that it is not in response to foreign pressure.
Were the US Treasury to declare currency manipulation, and Commerce Department to impose countervailing duties on Chinese imports, this would inevitably elicit Chinese retaliation, and this is likely to escalate into a trade war, despite Krugman’s sanguinity. This trade war could well spread to Europe.
China would seriously suffer from a trade war, as would Europe and the US. What should we do? Stop the public rhetoric and convince Beijing privately why a controlled yuan revaluation is in their interests.Author : Stanley Crossick