America and the yuan

The truth hurts

Will the Treasury call China a currency manipulator?

TO MOST people, to say that China holds down the value of its currency to boost its exports is to state the obvious. Not, though, to America’s Treasury Department. By law it must report twice a year on which countries fiddle their exchange rates at the world’s expense. China was last fingered in 1994. Ever since then, the Treasury has concluded that the designation would do more harm than good. Speculation is growing that it may decide differently in its next report, due on April 15th.

The mood in America resembles that in 2005, when the Senate voted to hit China with tariffs of 27.5% and the Treasury ratcheted up its rhetoric. China abruptly moved to a managed float for the yuan. It was allowed to appreciate by 20% over the next three years before a halt was called during the banking panic of 2008.

China seems more determined to resist pressure this time, though, and can rightly point out that its fiscal stimulus has halved its current-account surplus since 2007. America’s trade deficit with China has edged a bit lower (see chart), though further declines seem unlikely, now that its own recovery is under way.

Nonetheless, the weight of opinion in America is running heavily against China. Unemployment has doubled since 2005 and Barack Obama wants exports to lead the recovery. That will be harder if China sticks to its export-centric yuan policy.

Businesses have also become less reliable defenders of China, rankled by measures such as an edict last autumn which, according to American technology companies, virtually shuts them out of Chinese government procurement. The hacking attacks on Google and the trial of Rio Tinto executives have hardly helped. “A whole slew of multinationals I’ve talked to are increasingly fed up with how they are being dealt with on micro, industry, product-specific stuff,” says Fred Bergsten, director of the Peterson Institute for International Economics, a think-tank.

Charles Schumer, a Democratic senator, and Lindsey Graham, a Republican, authors of the 2005 China tariff bill that probably pushed China to move, have introduced a variant that would force the Treasury to make the designation and then seek redress through the International Monetary Fund, the World Trade Organisation, and unilateral duties. One manufacturing-union group has produced maps showing just how many jobs each congressional district and state has lost to China.

A popular view in Washington is that the Treasury could call China a manipulator to wrest control of the issue from hotheads in Congress. The practical consequences are small: it requires the United States only to consult with the offending country, something the two already do frequently. It would also fulfil Mr Obama’s promise to use America’s trade enforcement tools more vigorously. But Nicholas Lardy, also of the Peterson Institute, thinks that—far from restraining others—a Treasury designation of China as a manipulator would be “like throwing red meat to the Congress and enhancing the possibility they pass a currency bill.”

The administration’s best hope is that China moves of its own accord before events in Congress or elsewhere force a confrontation. Tim Geithner, the treasury secretary, is surprisingly confident that China will act. Sander Levin, the usually interventionist-minded chairman of the House Ways and Means Committee which oversees trade matters, advocates multilateral rather than unilateral pressure. So perhaps the administration will give China one last chance and seek a multilateral remedy at the G20 in June. If China still fails to respond, the Treasury, by the time of its autumn report, will no longer be able to deny the obvious.