U.S. Treasury Secretary Timothy F. Geithner delayed a scheduled April 15 report to Congress on exchange-rate policies, sidestepping a decision on whether to accuse China of manipulating the value of the yuan.Geithner's statement is available here, and I must admit that I'm torn about this decision. On the one hand, it's a good sign that the Obama administration is trying to use quiet diplomacy, as opposed to direct confrontation, to deal with the currency issue. That's certainly a positive thing, as any aggressive unilateral response would probably (a) cause China to stubbornly delay RMB appreciation due to the government's paramount need to appear "strong" on the global stage; and/or (b) end up hurting American consumers and exporters.
Geithner in a statement yesterday urged China to move toward a more flexible currency and said a series of meetings over the next three months will be “critical” to bringing policy changes that lead to a stronger, “more balanced” global economy. The delay comes as Chinese President Hu Jintao is scheduled to visit Washington for a nuclear summit April 12-13.
The Treasury chief faces demands from Congress to label China a currency manipulator for keeping the value of the yuan little changed from about 6.83 to the dollar for almost two years. Geithner is instead betting that China will take steps on its own in the next several months to strengthen its currency, analysts said.
“There is pressure within China for a yuan revaluation and, as long as exports continue to rebound, there is a good chance that it will happen,” said Elizabeth Economy, director of Asia studies at the Council on Foreign Relations in New York. “If, however, there is a lot of public pressure emanating from the U.S., that will likely give support to those in the Chinese government who do not want to see a revaluation.”
On the other hand, I'm concerned that Geithner's move might be too clever by half. By delaying the Treasury report, the US government still appears to be using it as a Damoclean sword to push China to appreciate its currency. This move clearly turns the report into a US ultimatum tied directly to Yuan movement (i.e., "appreciate or else!"), rather than a regularly scheduled, legally-mandated bureaucratic event. Will China be able to play this off without appearing to appreciate its currency in order to avoid American scrutiny that was specifically delayed to affect the Chinese decision? I'm not so sure. Second, I'm concerned that the administration is again "voting present" on a critical international trade/diplomacy issue. Clearly, the White House is in a pickle here: cite China as a "manipulator" and end up doing more harm than good; or don't cite China and face the wrath of congressional protectionists, labor unions, and some US manufacturers. But instead of making a strong, principled decision and then defending it to any and all critics (including some of their allies), the administration is punting. Again. Although this might be politically smart (but again, I'm not so sure it is), it's not exactly the face of confident international economic policy. Thus, it's rather unclear to me that, while the report's delay is certainly expedient and better than the worst possible outcome (direct retaliation), it's overall a smart move by the Obama administration.
What is clear, however, is that the delay has (unsurprisingly) miffed congressional currency hawks like Sen. Chuck Schumer (D-NY), who took a moment out of his busy campaign schedule to express "disappointment" with Geithner's decision and to reiterate his skepticism that quiet diplomacy will lead the Chinese to eventually unpeg the RMB. (Because bellicose unilateral retaliation will, like, totally work instead. Rrrriiight.) It's also increasingly clear that the Senator and his angry congressional colleagues simply have no clue what they're talking about when they confidently assert that RMB appreciation will magically and dramatically help the US economy and "save" American jobs. The aforementioned Bloomberg article hints at this when it discusses how some of the strongest advocates for appreciating China's currency are Chinese businessmen:
Last month, Chinese executives, in interviews with Bloomberg News, joined in backing a stronger yuan, even as Premier Wen Jiabao says the currency isn’t undervalued.These statements indicate that, contrary to what Schumer and others claim, RMB appreciation could actually make Chinese producers more competitive, not less, because of (among other things) China's current role as a global assembly point and net importer of industrial inputs and raw materials. Indeed, as Cato's Dan Ikenson noted in a recent Wall Street Journal op-ed, "Studies suggest that one-half to two-thirds of the value of 'Chinese' imports is added in other countries, including the U.S." Thus, if/when the RMB appreciates, one-half to two-thirds of Chinese producers' total costs (the "import costs" that Chen Daifu references above) will actually decrease, thus improving (or maintaining) the overall competitiveness of exported Chinese products made from suddenly cheaper imported inputs.
Yang Yuanqing, chief executive officer of Beijing-based computer maker Lenovo Group Ltd., said gains would boost consumers’ purchasing power. Qin Xiao, chairman of China Merchants Bank Co., said an end to the yuan’s 20-month peg to the dollar would let lenders set market-based interest rates. Chen Daifu, chairman of Hunan Lengshuijiang Iron & Steel Group Co., said a stronger currency would cut import costs.
Ikenson also points out several other facts which strongly argue that RMB appreciation could harm, not help, the US economy. And it's because of these realities, and a few others, that Yale economist Ray Fair estimates that China's currency policies have actually benefited the American economy through a net gain of over 50,000 jobs. (See this Phil Levy blog entry for a quick explanation of why Fair's analysis differs from, and is better than, all the job-loss wailing and gnashing by Paul Krugman and his fellow currency hawks.)
Normally, I'd say that the Chinese statements and the accompanying factual support strongly suggest that Schumer and his currency cohorts might want to pipe down about the evils of a pegged RMB and the miracles of any appreciation. But we all know better than that. As Schumer's statements about China trade, and those of other demagogues like Sen. Arlen Specter unequivocally demonstrate, the arguments coming out of Congress have nothing to do with economics, logic or sanity, and everything to do with getting re-elected. So no matter what China does this year, it will remain many campaigning politicians' bogeyman until November 2010. Guaranteed.
But that doesn't mean that we should just let them get away with it. And I think that a good place to start is by simply letting these politicians know that the Chinese business community shares their intense desire for RMB appreciation. With allies like those, it kinda makes you wonder who the Senators' enemies really are, huh?