by Gary Clyde Hufbauer, Peterson Institute for International Economics
Op-ed in National Interest
April 12, 2010
© National Interest
To get more Chinese cooperation on currency revaluation and Iran, Obama should refrain from criticizing Beijing's greenhouse gas problem and signal that provocations over Tibet and Taiwan aren't part of his diplomatic agenda.
Can the Obama team dance as gracefully as Nixon and Kissinger? Or will the Obama White House end up with bruised feet from the quick steps of its Chinese partners? The diplomatic minuet is fascinating because three disconnected policy issues are now whirling on a single dance floor. How it ends is anybody's guess.
On March 29, Deputy Secretary of State James Steinberg reiterated US observance of the "one China" policy, meaning American opposition to independence for Tibet and Taiwan. On April 1, President Hu Jintao announced he would favor President Obama by joining the nuclear nonproliferation summit, to convene in Washington April 12 and 13. On April 3, Treasury Secretary Timothy Geithner postponed the biannual currency report, which was on track to name China as a currency manipulator. On April 7, returning from India, Geithner made a sudden stop in Beijing to chat about the yuan-dollar relationship with Vice Premier Wang Qishan.
Expectations from this minuet are riding high. China's participation in the nonproliferation summit hints at cooperation with the US stance against Iran and North Korea. Geithner's postponed report and his chat with Wang Qishan spark hope of a revalued yuan.
Are these expectations realistic? Bear in mind that team Obama is pressing two demands on China: cooperation on a revalued yuan, and help with isolating Iran and North Korea. How much cooperation can team Obama extract? What can it deliver to President Hu Jintao in exchange for the favors?
The period between July 2005 and July 2008, when China temporarily abandoned its peg to the US dollar, suggests the maximum extent and pace the Chinese might allow the yuan to appreciate. During that period, the yuan increased 20.15 percent against the dollar; on a per month basis the average increase was 0.52 percent. Part of any currency bargain will be implicit US recognition that currency matters are primarily a matter for Chinese sovereign decisions, and only secondarily a matter of concern for the International Monetary Fund and the World Trade Organization.
In political terms, China will evaluate the tolerable extent of currency appreciation by the pace of export growth, the rate of domestic inflation, and the threat of property-market bubbles. Similarly, and again in political terms, the US Congress will evaluate the success of the currency bargain by the bilateral trade balance. The US trade deficit with China climbed steeply from $58 billion in 2003 to $171 billion in 2008. The bilateral trade deficit is often, if wrongly, cited as a contributing cause to American unemployment. If the bilateral trade deficit widens, and if US unemployment hovers above 9 percent, it seems all but certain that Congress will renew its calls for stern action against Beijing. Senator Charles Schumer (D-NY), among others, has a full plate of measures on offer. We can hope that this dance will deliver a temporary delay of the looming trade and currency war. Whether the postponement is long-lasting depends on the interaction of economic events in China, the bilateral trade deficit, and the evolution of US unemployment.
What about Iran and North Korea? The most Obama can expect from China is rhetorical criticism of the two regimes, accompanied by soft sanctions. The denial of refined gasoline to Iran and the blocking of Tehran's banking relations are out of the question. Nor will China pressure North Korea with trade restrictions on vital materials. Will soft sanctions, endorsed by China, defuse the Iranian and North Korean threats? Possibly, but not likely.
What can the Obama administration put on the negotiating table to extract concessions on currency and nonproliferation from Beijing? Among other things, Washington can promise not to flagellate Beijing over greenhouse gas emissions and it can signal that Tibet and Taiwan provocations are not part of its diplomatic agenda.
Are the concessions by both sides an even trade? History will decide whether team Obama has the Nixon/Kissinger touch, or whether it was flat-footed on the diplomatic dance floor.
Working Paper 12-19: The Renminbi Bloc Is Here: Asia Down, Rest of the World to Go? October 2012
Policy Brief 12-7: Projecting China's Current Account Surplus April 2012
Book: Sustaining China's Economic Growth after the Global Financial Crisis January 2012
Book: Eclipse: Living in the Shadow of China's Economic Dominance September 2011
Op-ed: For a Serious Impact, Tax Chinese Assets in the United States October 13, 2011
Op-ed: Taxing China's Assets: How to Increase US Employment Without Launching a Trade War April 25, 2011
Op-ed: Why the World Needs Three Global Currencies February 15, 2011
Policy Brief 10-26: Currency Wars? November 2010
Op-ed: Obama Has to Tell Beijing Some Hard Truths November 29, 2010
Congressional Testimony: Correcting the Chinese Exchange Rate September 15, 2010
Policy Brief 10-20: Renminbi Undervaluation, China’s Surplus, and the US Trade Deficit August 2010
Op-ed: Chinomics: Yes, China Does Need that Infrastructure June 23, 2010
Policy Brief 10-16: Deepening China-Taiwan Relations through the Economic Cooperation Framework Agreement June 2010
Congressional Testimony: China's Exchange Rate Policy and Trade Imbalances April 22, 2010
Op-ed: New Imbalances Will Threaten Global Recovery June 10, 2010
Policy Brief 10-7: The Sustainability of China's Recovery from the Global Recession March 2010
Congressional Testimony: Correcting the Chinese Exchange Rate: An Action Plan March 24, 2010
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Speech: Is China a Currency “Manipulator”? January 28, 2009
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