Thursday, February 04, 2010

Against the Weak Yuan, a Coalition of the Wounded?

To the rising chorus of voices crying, "China is mercantalist," Aryind Subramanian of the Peterson Institute adds a fresh perspective: China's exchange rate policy primarily hurts other developing countries:
It is time to move beyond the global imbalance perspective and see China’s exchange rate policy for what it is: mercantilist trade policy, whose costs are borne more by countries competing with China – namely other developing and emerging market countries – than by rich countries. The circle of countries taking a stand against China must be widened beyond the US to ramp up the pressure on it to repudiate its beggar-thy-neighbourism. But progress also requires that the silent victims speak up. Emerging market and developing countries must do a “Google” on China.
That is, it's time to assemble a coalition of the wounded:
Hence the third consequence. By default, it has fallen to the US to carry the burden of seeking to change renminbi policy. But it cannot succeed because China will not be seen as giving in to pressure from its only rival for superpower status. Only a wider coalition, comprising all countries affected by China’s undervalued exchange rate, stands any chance of impressing upon China the consequences of its policy and reminding it of its international responsibilities as a large, systemically important trader.
Bearing this thesis out, China today upped the ante on U.S. complaints about the yuan:
China today disputed Barack Obama's suggestion that it was artificially depressing its currency to gain a trade advantage.

The US president promised to take a tough line with Beijing over its currency and implied it was breaking trade rules in the latest in a series of rows straining US-Chinese relations.
His remarks were dismissed by the Chinese foreign ministry spokesman, Ma Zhaoxu, who said the yuan was correctly priced.

"At the moment, looking at international balance of payments and forex market supply and demand, the level of the yuan is close to reasonable and balanced," he told a press conference.
"Criticism and pressing obviously is not helpful to solving problems."
James Fallows has warned repeatedly that public pressure on China to change a specific policy is usually counterproductive. More recently, however, Fallows has noted that China itself seems to be entering a Bush-Cheney phase in which it actively seeks confrontation. How, then, to react to public threats and pressure from China?  Subramanian's call to coalition-build seems a timely piece of the puzzle.

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