by Marcus Noland, Peterson Institute for International Economics
Op-ed in the Financial Times
September 29, 2004
© Financial Times
A Republican president faces re-election. His tax cuts have plunged the budget into record-breaking deficits, accompanied by an overvalued dollar, and a trade gap of unprecedented magnitude. The Congress is growing restive, and protectionists are on the march. Re-election is far from assured.
The Treasury Secretary, a former corporate CEO, knows that he must sell tens of billions of dollars of bonds every month to keep interest rates from tearing through the roof. He scans the globe looking for the deep-pocketed customer who can keep sales up and his boss employed, when his practiced salesman's eye comes to rest in the Far East. They have got plenty of savings to invest, but there's a catch: The local law blocks prospective customers from making the purchase in US dollars. But for every problem there is a solution, and in this case it is straightforward: get the law changed, get the capital flowing out, and get the boss re-elected. Ronald Reagan and Donald T. Regan in Japan in 1984? Wrong. Try George W. Bush and John Snow in China, 2004.
With America's election year trade deficit heading toward $600 billion and the bilateral imbalance with China accounting for perhaps one quarter of the total, the Bush administration has been under intense political pressure to “do something” about China. Twice this year the administration has rejected petitions from unions and manufacturers seeking protection from the Chinese onslaught. But recent Treasury statements suggest that in a battle between Wall Street and Main Street, the administration has sided decisively with Wall Street's financial interests.
A US Treasury statement of September 9, when the administration refused the Section 301 petition of the self-styled China Currency Coalition (CCC), follows the pattern set by its predecessors by emphasizing the desirability for China to liberalize capital market outflows and integrate foreign (read US) financial services firms into the Chinese market. In both respects it is eerily reminiscent of the Treasury's line more than 20 years ago in Yen-Dollar Talks, which successfully liberalized Japanese capital outflows, facilitating the purchase of billions of dollars of Treasury bills by Japanese investors and the re-election of Ronald Reagan. But it also contributed to the depreciation of the yen, widening trade imbalances, and fractious trade relations.
When the talks were announced in 1983, the exchange rate stood at ¥232 to the dollar, the US trade deficit was under $60 billion and the bilateral deficit with Japan was $20 billion, figures that seem almost quaint in retrospect. Within a year of the conclusion of the negotiations in 1984, the yen had depreciated to ¥265 and James T. Baker, Donald Regan's successor, was organizing an international effort to bring down the soaring dollar and forestall protectionist actions in Congress. By 1987 the overall deficit stood at more than $150 billion, the bilateral imbalance accounted for more than one third, and Baker was reduced to publicly boasting that his boss had imposed more protection than any president since Herbert Hoover.
A wise man once observed that history repeats itself, appearing first as tragedy then as farce. As in the 1980s, Congress is getting into the act: Legislation has been introduced, which would threaten China with WTO and IMF sanctions if it does not float its currency. The bill is currently bottled up in the House of Representatives, and the House leadership is unlikely to do anything between now and the election to embarrass the president. John Kerry, the Democratic presidential nominee, has avoided signing on as a co-sponsor of the legislation in the Senate, so a holding pattern is set until after the November elections regardless of who wins the Presidency.
Rather than reviving the economic diplomacy of the 1980s, the next administration should push for a one-time renminbi revaluation of perhaps 15 to 25 percent under China's existing exchange rate management system. From a Chinese perspective the revaluation would contribute to the cooling of the Chinese economy and would discourage additional speculative inflows that are affecting China's already shaky banking system. However, unlike the current Bush policy, a step revaluation would give China time to stabilize its banking system before subjecting it to the vagaries of the international capital market. A step revaluation could also facilitate a more general realignment of Asian exchange rates that would be a welcome component of global adjustment, as opposed to the likely short-run depreciation of the renminbi under the Bush approach.
Policy Brief 13-16: Preserving the Open Global Economic System: A Strategic Blueprint for China and the United States June 2013
Working Paper 12-19: The Renminbi Bloc Is Here: Asia Down, Rest of the World to Go?
Revised August 2013
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
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
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
Testimony: Correcting the Chinese Exchange Rate: An Action Plan March 24, 2010
Paper: Submission to the USTR in Support of a Trans-Pacific Partnership Agreement January 25, 2010
Peterson Perspective: A Growing US-China Rift January 6, 2010
Book: China's Rise: Challenges and Opportunities (hardcover) September 2008
Paper: China Energy: A Guide for the Perplexed May 2007
Speech: Is China a Currency “Manipulator”? January 28, 2009
Testimony: China's Role in the Origins of and Response to the Global Recession February 17, 2009
Book: US-China Trade Disputes: Rising Tide, Rising Stakes August 2006
Book: Debating China's Exchange Rate Policy April 2008
Working Paper 11-14: Renminbi Rules: The Conditional Imminence of the Reserve Currency Transition September 2011
Testimony: A Muscular Multilateralism to Engage China on Trade September 21, 2011
Peterson Perspective: Legislation to Sanction China: Will It Work? October 7, 2011
Book: The Future of China's Exchange Rate Policy July 2009