With China, no easy solutions

By Lee Hamilton
Apr 6 2010

 Over the weekend, Treasury Secretary Tim Geithner announced he would delay submitting a report to Congress identifying countries guilty of "currency manipulation." The million-dollar question was whether China would end up on the list.

China's listing could have emboldened Congress to impose blanket tariffs on Chinese imports, sparking a trade war with the potential to derail the global economic recovery. The delay may ease recent U.S-China tensions.

We should get used to China's centrality in many of our policy debates. There is no bilateral relationship more important than that between Washington and Beijing, and it will shape the next decades, if not the century.

Nonetheless, many Americans over-estimate the Middle Kingdom's strength. China is big, growing, well governed, and booming, though still searching for its identity and path forward. It is becoming increasingly influential economically and militarily. It also defends its national interests vigorously, and appears disinterested in acting as a responsible stakeholder in the international system.

But this is hardly a cause for panic. The United States is still the more dominant actor internationally. We should continue to engage the world multilaterally and encourage China's participation. Such an approach might make sense on the currency question, an important, but hardly unique, point of contention.

In recent months the two countries have clashed over: American military sales to Taiwan, President Barack Obama's meeting with the Dalai Lama, Internet freedom, and further United Nations sanctions on Iran. China has also rolled back market reforms and reined in the media. But in a time of economic hardship and 10 percent unemployment, the currency issue is particularly sensitive and politically charged in America (and China, as well). One expert estimate suggests that, since 2008, Beijing has undervalued its currency, the yuan, by as much as 40 percent.

Beijing's currency policy subsidizes its exports and raises the cost of imports to the benefit of Chinese exporters and foreign consumers of Chinese goods, including Americans, and at the expense of Chinese consumers and foreign exporters. Allowing the Chinese currency to appreciate could stimulate domestic consumption in China and decrease its exports, boosting job growth elsewhere.

In a recent speech, Obama said China's movement toward a "more market-orient exchange rate will make an essential contribution to" global rebalancing efforts.

The Chinese response was swift and aggressive. While a trade war would hurt China, "the American people and U.S. companies will be hurt even more," the Chinese commerce minister said.

The appreciation of the yuan might boost American exports — one of the administration's economic priorities — but there are many structural factors beyond currency valuation in play. After all, the yuan rose 21 percent against the dollar from 2005-2008, with little impact on trade imbalances.

Though currency revaluation is hardly a cure-all for the United States, it might still make a difference. By depressing much-needed Chinese demand during an economic recovery, one expert estimates that China's currency policies have cost 1.5 percent of world GDP, no small figure.

However, there are two things worth remembering.

First, America is not the only country China's currency policies affect. Thus, we can engage others in multilateral forums, like the G20 — apparently Geithner's preferred approach — to encourage a shift in Chinese policy. Unilaterally hectoring China could prove counterproductive.

Second, U.S.-China cooperation is vital on a wide range of issues: nonproliferation, climate change, and terrorism among them.

American diplomats have been hard at work for months attempting to secure Chinese support for an additional round of sanctions on Iran at the U.N. Security Council. It's impossible to predict how a fight over the yuan would concretely affect those efforts, but surely it wouldn't help.

This doesn't mean the United States is powerless or incapable of defending its economic and political interests. But it reminds us again that no "solution" — either a revaluation of the yuan or tariffs on Chinese exports — is quite as simple as it sounds.

(Lee Hamilton is Director of the Center on Congress at Indiana University and Director of the Woodrow Wilson International Center for Scholars in Washington, D.C. He was a member of the U.S. House of Representatives for 34 years.)