"China Currency Coalition" Obama, Lookit This

I have a nuanced position on probably the most important political-economic relationship extant, that between the US and China. While I am no protectionist by any stretch of the imagination, I have for quite some time now been keen on American politicians slapping all sorts of protectionist measures on China. Why? Two things: First, unwinding global imbalances still has some way to go in terms of stopping still-healthy global demand for Treasuries. As long as America can avail of cheap foreign funding, imposing market discipline on a wastrel nation will not work. In effect, America is simply being allowed to move its deficits in a big way from the private to the public sector without much change in the abhorrent global situation of capital flowing upwards from poor to rich countries. Second, it will demonstrate to the US once and for all its lost hegemony in terms of "biting the hand that feeds." Clearly, America shouldn't get its way: had such abundant amounts of cheap foreign financing not been available, the current mess wouldn't have been as deep as it has been. The losers are all of us.

In rhetoric at least, Obama has indicated willingness to impose protectionist measures on China, especially over its reluctance to allow more currency flexibility. Recall that Obama was (is?) a member of the resident Congressional China-bashing crew, the so-called "China Currency Coalition." I recently suggested that the credit crisis is exacerbating the worst tendencies of various world economies. This is especially the case with China, which has reinstated all sorts of export subsidies and is now, get this, back to devaluing the yuan. Yesterday established a one-day record for yuan losses vis-a-vis the dollar, with more RMB weakness likely in store as China tries to safeguard dwindling exports [click chart above to enlarge]. At this rate, USD/CNY should be above 7.00 in no time. Given that the China bashers were already unhappy with the nominal rate of yuan appreciation, this marked reversal should rock their world.

China bashers and others clamoring for a more activist US economic policy have largely been disappointed by Obama's economic team choices. Summers? Volcker? It's true that Obama is now answerable to a wider constituency than the understandably more trade-phobic Illinois set he used to mind. Even if I don't agree with them, it's a shame how Democratic presidents seem to discount the organized labor / tradophobic sets whose support they have exploited upon reaching office. Call it the Clinton effect: President Bill said he wanted to tie China's human rights record to renewal of its most-favored nation (MFN) status. Now Obama says trade deals ought to be tied to environmental and labor standards. Same banana.

So, I lie in wait for the Great Protectionist Legislation of 2009. With Bush removed from office, a major impediment to such a bill passing is now gone. C'mon, Obama, you know you like it--let some protectionist legislation go through. Slap some good ol' Super 301 action on China. (Maybe you should aid Detroit while you're at it, too.) I want to see global economic imbalances licked for good. If you think things are bad in the US now, think what will happen when the world finally tires of funding America's endless deficits while being treated so poorly. Your erstwhile China Currency Coalition colleagues are counting on you:

The China Currency Coalition ("CCC"), whose members represent a broad cross-section of American manufacturers, producers, farmers, and unions, today congratulated President-Elect Barack Obama on his historic victory yesterday and expressed the hope that with his leadership the economy and national security of the United States will be strengthened.

As part of this process, the CCC urged in a letter (available at www.chinacurrencycoalition.org) by its Co-Chairmen, Doug Bartlett and Richard L. Trumka, that the 111th Congress pass and President Obama sign bipartisan trade legislation in early 2009 that allows affected American industries to offset with countervailing or antidumping duties unfairly priced, injurious imports from China or any other country that supports exports by means of enforced undervaluation and fundamental misalignment of its currency. This approach is incorporated in the Bunning-Stabenow-Bayh bill, S. 796, The Fair Currency Act of 2007, which has ten co-sponsors including President-Elect Obama. It also is embodied in companion legislation by Congressmen Tim Ryan (D-OH) and Duncan Hunter (R-CA), H.R. 2942, The Currency Reform for Fair Trade Act of 2007, which has 77 co-sponsors.

The CCC estimates that, despite a nominal appreciation of approximately 17 percent since July 2005, China's renminbi remains substantially undervalued against the U.S. dollar - by 35 percent in real terms. As a result, China has amassed enormous foreign exchange reserves in excess of $2 trillion and has had in recent years an annual trade surplus with the United States of roughly $250 billion. In an attempt to remain competitive with China, other countries have similarly undervalued their currencies.

"It would be difficult to overstate how critical market-driven exchange rates are to U.S. commerce and global trade," commented Bartlett. "By fundamentally misaligning and undervaluing the renminbi, the Chinese government has been creating extremely dangerous imbalances that severely undercut U.S. manufacturers' ability to compete with Chinese products in the United States as well as in third countries and that often shuts U.S. exports out of China. This arrangement obviously is not sustainable for the United States, especially in this time of worldwide financial and economic turmoil. It seriously weakens our economy and undermines our national security. If we are to recover from the current economic crisis, we must be able to manufacture products here, provide good jobs for Americans, and create wealth at home - not send it overseas."

Added Trumka, "President-Elect Obama knows from his campaigning across the United States how many Americans and their families are suffering due to cheap imports from China and other countries that undervalue their currencies. It is time to put a stop to these unfair trade practices that have resulted in millions of skilled jobs going abroad. The Bush Administration's policy of simply talking with China has not worked. Our country cannot afford to continue this way. We need action not words. Prompt passage of effective legislation is vitally important."

Observed David Hartquist, the CCC's legal counsel, "Both S. 796 and H.R. 2942 recognize the hybrid nature of undervalued exchange-rate misalignment as a monetary measure that has adverse consequences for international trade. China's protracted, large-scale interventions in the exchange markets have resulted in injurious imports into the United States of subsidized Chinese-made products and in a formidable non-tariff barrier to exports from the United States to China. Legislation like S. 796 and H.R. 2942 underscores that the United States and its workers, companies, and farmers expect China to uphold its international legal obligations at the World Trade Organization and at the International Monetary Fund."

Remember that the WTO has no stipulations on currency manipulation. And, of course, many of these proposed "remedies" would be WTO-illegal to boot.