US Taking a Harder Line on China Trade?

That’s the story from Obama’s Treasury Secretary nominee, Timothy F. Geithner, who apparently said during his confirmation hearing that Obama believes China is “manipulating” its currency.

As the New York Times points out, the comment is sure to annoy Chinese leadership, if the news doesn’t somehow get lost in the bustle and traffic on the last day before the Spring Festival holiday. According to the Times,

it remained unclear whether Mr. Geithner was signaling that Mr. Obama would officially declare later this spring that China was engaging in currency manipulation, when the administration is required by a 20-year-old trade law to report to Congress on exchange rate issues. Such a finding would begin a legal process that starts with diplomacy and could end with the imposition of trade barriers like tariffs. The objective would be to persuade China to let the value of its currency, the yuan, freely float — a move that would let its value rise and would increase the cost of its exports.

Either way, the Bush administration never went so far as to outright call China currency manipulators; such a dramatic shift in tone just two days into the new administration may herald a change in relations for the two countries, especially on economic issues. Beijing is unlikely to take such accusations sitting down and, as John Pomfret points out, China is one of the largest foreign holders of US Treasuries, which has potentially giant implications for the American economy should they choose to alter their policies. The fear is that if America pushes China to devalue its currency, the Chinese might be less willing to invest in US debt and float the national deficit.

The Times story reports that some American experts are not particularly thrilled with Mr. Geithner’s statement either:

“It’s huge,” said Simon Johnson, a former chief economist at the International Monetary Fund who is now a professor of economics at the Massachusetts Institute of Technology. “I’m very supportive in general and I think China needs to be called to account and the I.M.F. has not done it,” he said.

But, he added, “I have to say this is really a bit of an issue for Mr. Obama’s internationalist sort of theme for his foreign policy because this is going to be at least a spat with China, and if we don’t back down it’s then a row, and you know how that goes.”

[…]

“You know the world has changed a lot with the financial crisis and China has a lot in U.S. Treasuries,” said Frank Vargo, vice president for international economic affairs at the manufacturers’ association. “This needs to be done in a cooperative, not a confrontational, way.”

Some market strategists said Mr. Geithner’s statement inflamed a contentious issue unnecessarily given that China’s exports and economy were slowing significantly.

“Things have changed quite a bit since Hank Paulson made an issue of this,” said one, Edward Yardeni, an independent analyst, referring to Henry M. Paulson Jr., the just-departed Treasury secretary. “The Chinese trade surplus is shrinking dramatically and China’s economy is falling into recession. I think it really wasn’t necessary. It doesn’t accomplish anything.”

It appears likely that Geithner will be confirmed.

Also of interest today
China announces subsidies for universal health care (NY Times)
Online games included in porn crackdown (China Daily)
Foreigners do Chinese things! Ha ha ha! (People’s Daily)

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