Chinese Currency and Trade Issues Remain Central

The New York Times this morning covers China’s suppression of the renminbi to encourage exports and active use of the World Trade Organization’s rules to prevent protectionism by its trading partners. 

To maximize its advantage, Beijing is exploiting a fundamental difference between two major international bodies: the World Trade Organization, which wields strict, enforceable penalties for countries that impede trade, and the International Monetary Fund, which acts as a kind of watchdog for global economic policy but has no power over countries like China that do not borrow money from it.

China had a $198 billion trade surplus with the rest of the world last year, with its exports to the United States outpacing imports by more than four to one. Despite that, in the last 12 months, Beijing has filed more cases with the W.T.O.’s powerful trade tribunals in Geneva than any other country complaining about another’s trade practices.

In addition, Beijing has worked to suppress a series of I.M.F. reports since 2007 documenting how the country has substantially undervalued its currency, the renminbi, said three people with detailed knowledge of China’s actions.

China buys dollars and other foreign currencies — worth several hundred billion dollars a year — by selling more of its own currency, which then depresses its value. That intervention helped Chinese exports to surge 46 percent in February compared with a year earlier.

Paul Krugman, in his column today, calls on the Treasury Department to declare China a currency manipulator, I, like Krugman, believe that the common conception of China’s "ownership" of the U.S. is a bit backwards. (Think: When you owe the bank $1 million, the bank owns you, but when you owe the bank $100 billion, you own the bank.) Having said that, Krugman’s solution – "playing policy hardball" by imposing a 25 percent surcharge on imports – seems to approach dangerous levels of protectionism while the global economy remains unstable and could turn out to be ineffective, backfire, or start a trade war. 

Fundamentally, there seems to be a question of domestic Chinese politics at hand – the global economy would be helped by China floating the renminbi sooner rather than later, but that action cannot appear to come as a result of foreign, especially American, pressure. There is, of course, another calculation in play – China’s currency policies hurt America less than they hurt others, namely developing nations. Since public American pressure on this issue is likely to backfire and other countries should care about this a lot, we are left with the less-exciting (and less fun for economic pundits) avenue of behind-the-scenes diplomacy and multilateral action.

Two other stories worth following on global and domestic finance:

• European Monetary Policy remains in flux, as the French are displeased with German labor-cost practices. This follows calls to create a European Monetary Fund, which follow the Greek financial crisis.

• Senate Banking Committee Chair Chris Dodd releases financial reform legislation today. The need and appetite for such reform has only been fueled in recent weeks by an absolutely awful report about what went wrong at Lehman.