The intensity of debate over the US-China trade relationship was racheted-up this past week especially regarding the pressure for China to revalue its currency. The clarions call in the US is to charge China with being an unfair currency manipulator. China’s response has largely been to take more WTO-legal trade remedy actions against the US, or to file complaints about US trade remedy actions at the WTO dispute settlement board. These tit-for-tat trade actions may possibly increase as the country’s look for more ways to demonstrate the unfairness of the other.
Today I noticed something else though, reading Robert Samuelson’s piece in the Washington Post today. His piece presents the now standard narrative about why China is an unfair trader, in a way that suggests that the facts are so obvious, and the responses so necessary that only a fool could accept something different. My issue is with the conviction and certainty that Samuelson displays about what is really a much more complicated issue. This I think bodes poorly for the future easing of tensions.
For example he says that, “China has never genuinely accepted the basic rules governing the world economy. China follows those rules when they suit its interests and rejects, modifies or ignores them when they don’t. ” He goes on to say that other nations would like to do this but they can’t get away with it. Of course, he doesn’t mention the many times the US has lost WTO cases only to thumb our noses at the prescription and go about our business as usual.
He goes on to claim that China’s undervalued currency “hurt(s) most trading nations, from Brazil to India.” He doesn’t mention how lower import prices help millions of low income Americans (and Brazilians and Indians) and businesses using Chinese inputs. A low exchange value has both positive and negative effects in every country and it is very difficult to know which effects outweigh the other.
He also reports with near certainty how studies show that between 300,000 and 3.5 million jobs will be created with a substantial currency revaluation. The implication is that unemployment could be reduced substantially. Of course, these same studies ignore the fact that jobs may be lost due to lower financial flows on the balance of payments, nor do they recognize the aggregate relationship that has existed for the last 30 years in which unemployment tends to rise as trade deficits fall. Would that relationship continue to prevail after a Chinese currency revaluation? I don’t know, but, the outcome on jobs and unemployment is simply not so clear.
Finally, he goes on to say that a trade war with China would be unlike Smoot-Hawley since it would only be against one nation, not every nation. He ignores the notion that success in protecting against Chinese imports may inspire protectionist movements on a much broader scale; afterall, why stop with China, we import a much larger amount of goods from other countries combined and why not create millions more jobs by choking off even more trade?
Finally, to make his point as strong as possible, he argues that the choice is between two concepts of the world order. Yes that’s right, the “world order!!” In other words, this time it isn’t just a trade war, it’s a war about whether China or the US will be the dominant player. He says that failure to act now wouldn’t be a bad idea, or imprudent; no, it will be “potentially disastrous.” (At least he threw in the word “potentially!”)
It would seem that no well–informed observer can object to this narrative. A trade war may be imminent now because by accepting this dominant narrative there is no other choice.
I for one do not accept the narrative. I believe a yuan revaluation will have both positive and negative effects in the US, in China, and around the world. I do not think we can know, that is I am agnostic, about whether the action will help “our country,” or whether it will cause our unemployment rate to fall.
I think the Chinese main goal is not to “stick it to the US,” but rather to maintain internal economic, and therefore political stability. That is in our larger interests as well. China’s faces a potential real estate bubble explosion just as we did. They are extremely worried about making quick changes that would cause a reduction in the export earnings, the failure of Chinese businesses, and a rising unemployment rate. It is not in our larger interest to push the Chinese economy into a tailspin.
Finally, China, as a proud and increasingly influential nation in the world community, will naturally resist external pressure to change its policies in the way we would like. Every nation would do the same. Thus, the more we pressure China publicly, the slower China will act. For several reasons, China would like to allow its currency to rise in value. However, they are very reluctant to make quick changes, and they certainly don’t want to appear weak in the face of foreign pressure.
So why is this a big issue now? Mostly it’s political posturing. Whenever economic conditions are bad, it is useful to find a scapegoat, somebody to blame. The same tendency is seen with rising nationalism during hard times. If leaders can find an enemy to blame and attack, then one can rally the electorate around that cause and deflect criticism of oneself. For the moment, we just face the possibility of a trade war. At least, that is much better than the alternative diversion sometimes used when things get really bad economically; an all out military war.