US-China Trade: Only A Temporary Reprieve

[pakistanheritage]

Today’s papers give the impression of a collective exhale on U.S.-China relations. Chinese President Hu Jintao is coming to Washington for a global nuclear security summit and that means a trade war over exchange rates has been averted.

However, a better term than “averted” is “postponed.”

It is probably true that Washington and Beijing have an agreement: the U.S. will not label the PRC a currency manipulator and China will make some sort of policy change at or before the end of the bilateral Strategic and Economic Dialogue in late May. Unfortunately, a change in policy concerning the RMB (a.k.a. the yuan) will have little effect on trade and will not be enough to pacify Congress.

CATO’s Dan Ikenson has a good op-ed in The Wall Street Journal pointing out the small net impact on the American economy of previous changes in the value of the RMB. The value of the RMB just isn’t very important to American jobs. It’s hard to connect trade with just one country to the jobs picture in the U.S and, even if there is a connection, the Sino-American trade deficit doesn’t actually drop when the RMB rises.

An exceptionally large revaluation of the RMB would have some impact, but this is where the political side enters. Beijing loves stability. The PRC will probably copy or nearly copy the 2005-2008 scenario, with a very small RMB revaluation at the beginning and a slow climb after that. And the 2005-2008 revaluation did nothing for the trade deficit or American jobs.

Congress is going to realize this, sooner or later. Either the coming Chinese policy change will be immediately dismissed as not enough or, because the RMB doesn’t actually matter much, the revaluation won’t have anything like the impact Congress wants. Then we’ll be right back to where we were as of a few days ago.

To make genuine progress in Sino-American economic relations, the spotlight has to move off the exchange rate. On the U.S. side, by far the biggest problem is the budget deficit and diversion of resources to debt service, bailouts, and other unproductive government programs.

There are many problems on the Chinese side, which is why so many people around the U.S. are angry. But the RMB is just an easy target, not a good one. Far better would be to push the PRC – it won’t be easy – to cut subsidies for state-owned firms. These firms are protected from competition, get free land, endless loans, and so on. Eliminating subsidies isn’t going to happen. But reducing them will open the door for more U.S. goods and services to reach Chinese consumers.

Click Here for More