The lead editorial in today's Financial Times -- "China bashing is back with a bang" -- condemns the Senate for scheduling a likely yes vote next week on a bill that would enable imposition of countervailing duties to offset the subsidy to imports from China provided by the policy driven undervaluation of the Chinese yuan. The FT further berates the White House for not disavowing the bill, writing, "those concerned with the future of the global trading system should oppose this bill."
Much as I respect the FT, I wonder if, in this case, it might have the argument exactly backwards. Could it be that the future of the trading system is actually being well served by this bill?
A hint of a suspicion of weakness in its own case is provided by the use of the invidious "China bashing" terminology. Bashing is an emotive word, meant to imply viciousness, unreasonableness, hate, and even racism. Why is a bill whose passage has been much delayed in response to earlier criticisms by the FT and its allies and that deals with a widely acknowledged problem a matter of "bashing?" Why does the FT not use language like "Criticism of China?" Well, I haven't talked to the FT editors about it, but criticism is legitimate and acceptable while "bashing" is illegitimate and unacceptable under almost any circumstances. So if you want to discredit an otherwise perfectly legitimate criticism you call it bashing.
The irony is that the FT itself makes the case for criticism. For instance, it agrees that "no doubt Chinese currency manipulation has contributed at least partly to global imbalances" and admits that "currency misalignment is a problem." Indeed, once you get beyond the intemperate wording of its headline, you find that the FT's main argument is not that Chinese currency manipulation is a mere figment of protectionist imagination. Nor does the FT deny that China's currency manipulation is a serious problem that should be dealt with. The real issue for the FT is rather that the matter should be handled in some way other than legislation by the U.S. Congress.
We could all agree with that. Indeed, I dare say the congress would agree and, by dint of its delay in bringing the legislation forward, has agreed. The difficulty is that no other body or leader has stepped forward with a more palatable or effective method for addressing the problem.
And just to emphasize the extent of the problem, which the FT's "bashing" terminology tends to downplay, let me repeat some words spoken at the yesterday's East-West Center and Pacific Economic Cooperation Council (PECC) Washington conference. Long time free trade stalwart and Peter G. Peterson Institute for International Economics Director Fred Bergsten emphasized that China's currency policies are in violation both of International Monetary Fund (IMF) and World Trade Organization (WTO) rules and principles and that the extent of the undervaluation of the yuan versus the dollar is 20-30 percent. He further noted that on a trade weighted basis the yuan is more undervalued today than it was last year or five years ago and that China is buying $1 billion of dollars in the global currency markets every day to keep it that way.
Coming from a guy like Bergsten, who is almost always fully in the orthodox free trade camp along with the FT, this is really strong stuff. So strong indeed, that it inevitably raises the question of why the IMF and the WTO and the G-20 and/or other international bodies or major trading countries like the United States haven't dealt with the problem long ago. The answer, of course, is that some have tried. The G-20 has called for "rebalancing" and the IMF has had some indeterminate consultations and discussions. U.S. Treasury Secretary Timothy Geithner has had innumerable "Strategic Dialogue" sessions with his Chinese counterparts. But these have all had very insignificant results for the simple reason that all the institutions and countries, including the United States, are being intimidated by China or perhaps they are intimidating themselves. Geithner and the White House, for instance, have steadfastly refrained from formally saying what everyone knows to be true- namely that China is a currency manipulator. Washington is afraid to say that because it fears that China will be unhappy with such a statement that it might retaliate by cutting off U.S.-China military to military dialogues, or by reducing its buying of U.S. Treasuries, or in some other manner. And if Geithner won't even call China a currency manipulator you can understand that the administration definitely won't file a case with the WTO on grounds of nullification and impairment or illegal use of currency policy to offset concessions made in trade negotiations. And if Washington is scared of the Chinese, you can imagine how much backbone there is in Tokyo, Brussels, London, Paris, and Berlin - just about zero.
So it is in lieu of any other action that the U.S. congress is moving ahead with the only tool at its disposal - legislation. The Congress knows that legislation is a blunt instrument and is hoping against hope that the mere calling of a vote or the mere likelihood of passage will spur the White House and other bodies or leaders to begin to use their scalpels before the Congress wields its meat axe. Presumably this is what the FT wants too. So far from condemning the Senate, the FT should be cheering it on. At the very least it ought to suggest some truly viable avenue toward resolution of the problem of competitive currency devaluation rather than simply telling everyone else to cease and desist.
After all, let's not forget that it was competitive currency devaluation and not the Smoot Hawley tariffs that were the main driver of the downward spiral of the Great Depression. And it was precisely to prevent a repeat of this experience that the IMF was established after World War II. At last weekend's IMF/World Bank annual meetings, both IMF Director Christine Lagarde and World Bank President Robert Zoellick said in response to questions and in a somewhat jocular manner that "some currency appreciation by China would be nice."
That didn't qualify for the FT's "bashing" label. It also didn't prevent China from buying another $1 billion in the currency markets today.