July 1, 2010


For years now, the United States and Europe have complained about China's hugely undervalued currency. Here's the bad news: Despite occasional bombast and fireworks, no one plans to do anything about it.

Illustration by PJ Loughran

Like the weather, everybody complains about Chinese currency manipulation. But no one, especially the international agencies authorized to address the question, will do anything about it. Currency manipulation by China is a fine art, refined perhaps by thousands of years of self-satisfied history. Or perhaps a better metaphor is to see it as a game, with rules that make the state of play excruciating, and the price of admission hideously costly. Never mind the score. The West fumbles and accommodates, kowtows and defers. China wins. We lose.

We find no one except the Chinese these days denying that Beijing manipulates its currency, the Yuan, aka the Renminbi. Estimates vary, but China surely undervalues its currency by at least 25% and probably as much as 40%. They keep it cheap as an extremely powerful subsidy for their manufacturers to churn out cheap goods and ship them to North America, Europe and elsewhere.

For the Chinese, it works great. In the last eight years, the U.S. trade deficit with China has nearly tripled, from $83 billion to $227 billion last year. We are on track to keep that deficit booming greatly in excess of the growth of the economy itself. In just the first three months of this year, the U.S. Census Bureau says, we bought $52 billion more in goods from China than it did from us. Even the White House acknowledges that this trade deficit has cost us millions of manufacturing jobs, contributed heavily to unemployment and retarded the country’s ability to recover from recession.

And though there are glimmers that some American manufacturers are looking harder at their true costs [see cover story Page 14] and bringing some operations back to the states, it is also clear that so long as China keeps its currency cheap, America’s manufacturers will remain at a serious competitive disadvantage.

“We’ve got a strong currency for now, which makes imports less expensive, and mortgage rates and interest rates are down, and that will feel good for a while,” says Clyde Prestowitz, former principal U.S. trade negotiator for Asia, author, and founder of the Economic Strategy Institute in Washington D.C. His new book, “The Betrayal of American Prosperity,” looks at trade, China’s currency and how to boost U.S. competitiveness. “But their currency is undervalued by 40%. Real production is going to continue to leave the United States. And that will make it extremely hard to get unemployment down and raise wages. This is just not sustainable.”


It is just as clear that this Chinese currency manipulation violates a large grab bag of domestic and international trade rules, tariff and duty regulations and open market agreements. The World Trade Organization (WTO) enforces some, the International Monetary Fund (IMF) monitors others and the United States has its own arsenal of trade rule enforcement. Most of those directly relevant to the China currency game have been conspicuous by their absence. Many of them, the Chinese acknowledged and promised to adhere to when they were admitted to the World Trade Organization nine years ago.

Not too long ago, none other than Barack Obama declared: “The People’s Republic of China has manipulated its currency for years in order to gain an unfair advantage over the United States in trade. Unfortunately, the administration has failed to effectively challenge or change China’s behavior.” The administration he referred to, of course, was that of George W. Bush. The occasion for Obama’s comments was the Bush Treasury Department’s refusal in the middle of 2007 to clearly call China a currency manipulator in its semiannual currency and exchange report. This, thundered Obama, “raises serious questions about the administration’s commitment to protecting the interests of American businesses and American workers. I will work with colleagues in the Congress to force action and strengthen the ability of Americans losing out from Chinese currency manipulation to bring forward complaints for remedy through increased duties on Chinese goods.”

Of course, all that was three years ago, when Obama was merely campaigning to become president of the United States. He said it, but he didn’t mean it.

In April, the Obama administration, facing the prospect of having to sit before the Chinese at three international meetings in as many months, didn’t just decline to publicly call Beijing a currency manipulator. Obama’s Treasury declined to issue its semi-annual currency report altogether. They called it a “delay.”

“There are a series of very important high-level meetings over the next three months that will be critical to bringing about policies that will help create a stronger, more sustainable and more balanced global economy,” Treasury Secretary Timothy Geithner said in announcing the delay. “I believe these meetings are the best avenue for advancing U.S. interests at this time.”

In the global currency game, it seems, a report is not just a report. Ask the International Monetary Fund, a creature of the world’s allegedly modernized monetary system created after the Second World War. The Washington, D.C.-based IMF was concocted as an international monitor of the exchange rates of its member countries. When it is not lending money and otherwise shoring up the economies of member states (186 at last count), it issues reports, sometimes sharply worded, about currencies and their impact on trade. The members are said to be interested in a stable world currency system and open trade. And, therefore, they also allegedly agree to “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.” At least that is what it says in Article IV of the IMF’s Articles of Agreement, subsection iii of Section 1: General obligations of members.


Because of this fairly specific language, member nations and the other major player in this gambol, the Geneva, Switzerland-based WTO, often point to the IMF as the authority on currencies. And sure enough, last March at the IMF-WTO annual spring meeting, when the WTO’s Director-General Pascal Lamy was asked why his organization was not imposing sanctions, penalties or evil spells on China, he hastened to clarify: “I will repeat what you’ve often heard from me, which is that it’s not for the WTO DG to pass judgment on currencies. That’s the role of the IMF. So the right mailbox address is DSK, Washington, not PL, Geneva.” PL of course is Pascal Lamy. And DSK is IMF Managing Director Dominique Strauss-Kahn.


As if anyone needed proof of China’s masterful command of its currency’s value—and its equal understanding of just how easy it is to fool the West—a new lesson emerged in June. That’s when the People’s Bank of China, in a document that was almost painful to read because it was so finely worded, stated the obvious in a way calculated to promise very little while achieving a great deal.

What the statement said was this: Our economy has done so amazingly well that “it is desirable to proceed further with reform of the Renminbi exchange rate regime and increase the exchange rate flexibility.” What the statement promised was just this: The value of China’s currency, which was essentially frozen against the U.S. dollar two years ago, will again be permitted to move in a tiny, carefully managed daily range. This is the same “managed floating exchange rate regime” that the governed the yuan beginning five years ago, during a lengthy period of apparent exchange rate flexibility that produced insignificant gains in the currency’s value against the dollar.

Of course, any concession, even concessions that aren’t concessions at all, can excite speculators, the business press and politicians eager to demonstrate that their “talking cure” for the yuan’s manipulation has worked. “This is another small victory for Tim Geithner,” Goldman Sachs Group Inc. Chief Global Economist Jim O’Neill told the Bloomberg news service following the announcement. “It makes it a lot more difficult for Washington and Congress to do China bashing.”

And that’s exactly the point. China’s announcement, made just a week before a meeting of the G-20 economies, makes any official complainers about currency manipulation seem small and mean-spirited for the next little while. It makes it more difficult for Congressional advocates of direct U.S. action to pursue a sensible policy of declaring currency manipulation to be an illegal trade subsidy. But it requires, on the part of the Chinese, little or nothing.

For those readers who believe this analysis is far too harsh, we direct your attention to the state-controlled Shanghai Daily edition distributed the day after the People’s Bank announcement. It said:

“China’s central bank said yesterday it would maintain a stable exchange rate (emphasis added) and didn’t anticipate major changes in the value of the yuan, a day after saying it would manage the currency more flexibly … the central bank explicitly ruled out a one-off revaluation, repeatedly said there was no basis for any big appreciation and added that the currency’s value was not far off its fair level … The central bank promised to implement ‘dynamic management and adjustment’ which could lead to the yuan falling, not just rising, against the dollar … ”

When faced with “dynamic management and adjustment” of the yuan, how many rubes out there still believe they can win this shell game?

—Steve Weiner

“The IMF and WTO will not be an agent of change in currency disputes unless the U.S. initiates action,” says Prestowitz. “We could file a case with the WTO complaining that Chinese currency management is in violation of the organization’s anti-subsidy clause. There is other language in the WTO agreements that talk about countries not being allowed to use currencies to offset tariffs, which the Chinese are clearly doing.

“The IMF is a little different because on the one hand it is supposed to monitor currency and issue reports, and it has a kind of moral influence. The director of IMF could, in principle, initiate a consultation. But he doesn’t have any compulsory power. He can’t tell a country to do anything.”

So there was one small item that PL forgot to mention as he was passing the buck to DSK. The IMF has no enforcement powers. It can issue reports and advise, and wring its institutional hands, but that is it. When it does issue those reports, it seems to make everyone concerned unhappy. At the beginning of the year, for instance, the IMF’s annual economic report, and DSK himself, pronounced China’s currency “substantially undervalued.” But that was in no way good enough for 10 United States senators who promptly accused China and the IMF of suppressing a more critical report.

Charles Schumer (D-New York), Lindsey Graham (R-South Carolina), and eight others wrote a letter to Treasury Secretary Geithner demanding that the stronger report be released. “This report could be the smoking gun that confirms that China has been intentionally manipulating its currency to gain an unfair trade advantage,” Schumer said in a statement. “The fact that China insists on keeping the report under wraps is reason to believe they have something to hide.” The Chinese, just as promptly, said they knew of no such report. And the IMF said it had said what it wanted to say about China’s currency. Needless to say this is not the stuff of powerful policymaking.


The World Trade Organization, the 15-year-old successor to the General Agreement on Tariffs and Trade, is another can of worms altogether. As Monsieur Lamy himself told the Reuters News Agency at that spring joint meeting, “Now, true, there is one specific article of GATT-WTO that says that a country should not frustrate its trade-opening commitments in using its exchange rate policies.” But, he also said, “The rule is there. It’s never been tested, which is why I’m extremely cautious on this.”

Cautious is a good word when thinking about the WTO. Leisurely is another. You would not, of course, know that from the organization’s official description of how it operates. “Dispute settlement is the central pillar of the multilateral trading system, and the WTO’s unique contribution to the stability of the global economy,” it says. “The system is based on clearly defined rules, with timetables for completing a case. First rulings are made by a panel and endorsed (or rejected) by the WTO’s full membership. Appeals based on points of law are possible.”

The WTO has 153 members who together, the organization says, account for more than 97% of world trade. It has 143 members in common with the IMF. It does not rush into anything. “Decisions are made by the entire membership … typically by consensus,” says the WTO’s website. Then, it declares that “prompt settlement is essential if the WTO is to function effectively.” It also claims that, “If a case runs its full course to a first ruling, it should not normally take more than about one year— 15 months if the case is appealed. The agreed time limits are flexible, and if the case is considered urgent (e.g. if perishable goods are involved), it is accelerated as much as possible.”

Unfortunately, one searches in vain on the WTO’s own catalog of cases to find a case that was disposed of with such alacrity. Its own tally, for example, shows that as of January, the United States had filed 94 cases against varying members of the WTO for alleged violations of international trade agreements. The United States, in turn, had 110 cases filed against it. It is the leader, by far in both categories, with the entire EU in second place having filed 82 complaints and having had 70 filed against it.

Some of the U.S. cases have been pending since 1995 and ’96. All but three of the claims have been pending at least since 2008, and all but five of the claims against the U.S. have been sitting around since then as well.

Little wonder that “endless” is a commonly used word when WTO watchers describe its proceedings. It is one of the main reasons most currency activists give for urging that the drive to revalue the renminbi be pursued on multiple fronts. That, and given the WTO’s caution, it is not at all clear the U.S. would prevail.

“With the WTO, the consensus-building nature of it makes it a painfully lengthy process and not a very practical option,” says Scott N. Paul, executive director of the Alliance for American Manufacturing, which is trying to get the government to act against China on currency issues. “It could be a three- to six-year process, and it is unclear how sympathetic a panel in Geneva would be to currency manipulation. We might not get an outcome we want.”


Maybe not, but the people pushing hardest for currency reform are convinced there is a clear way to get it done that could involve the WTO. Or not. “What works here is a credible threat,” says Paul. “What the WTO and IMF don’t give you is a credible threat. What does work is implying that market access is at stake, that there will be tariffs. This has worked before, with China in 2005 and with Japan and Germany back in the ’80s. There have got to be consequences for the Chinese if they don’t change, and that is the missing message right now.”

“Not that we shouldn’t go to the WTO, we should,” says Professor Peter Morici, a trade and currency expert at the Robert H. Smith School of Business at the University of Maryland. “But first I would throw up a 25% tariff on the currency exchange and then keep increasing it until they filed a WTO case. Let’s get them to the table.”

The problem, as Paul and Morici readily concede, is that there are extremely powerful constituencies that really do not want to see China revalue its currency. American consumers like their cheap, made-in- China coffeemakers and whatnot. If we taxed Chinese imports, prices on inexpensive consumer goods would certainly increase.

The U.S. Treasury likes to have a ready and reliable buyer like China to buy government debt. Interest rates stay relatively low that way, and the dollar stays relatively strong and maintains its “safe haven” status for global investors. The White House is reluctant to rile Beijing on the off chance it might actually help with nagging international recalcitrants like North Korea and Iran, among others. Terrorism and additional wars are powerful distractions for an administration that, after all, professes to see the U.S economy recovering.

“Regardless of the administration, the primary international priority of the U.S. is to play the great game of geopolitics,” says Prestowitz. “That is, worrying about what they perceive as the big stuff, moving troops, Iraq, Iran, North Korea, the big things statesmen like to do. And that is simply a much higher priority than our economic circumstance. So we make economic concessions. We think we need China to help us deal with North Korea and Iran, so we do not want to upset them with some currency thing.”

But it is not just geopolitics that stalls any action. “You have a large percentage of business in the country whose business model is produce offshore and sell in the U.S.,” says Lloyd Wood, media coordinator for the Fair Currency Coalition and spokesman for the American Manufacturing Trade Action Coalition, two other currency-lobbying groups. “They hold a dominant policymaking position in the political process. Then there is the Tea Party movement and other conservatives who for better or worse want no new taxes at all.”

Also, as Wood points out, “On the liberal side the position is that if imports are made more expensive that would reduce the standard of living of the poor and middle class.”

Prestowitz, and Morici say, too, that those in the White House who most have the president’s ear— Economic Adviser Larry Summers and Treasury Secretary Geithner, not to mention most of Wall Street—are firm believers that global trade in its present form is a net plus for the United States. The currency reformers also say that the White House has it dramatically and totally wrong.

“Labor can’t move. They can’t go to China, but the big companies can,” says Prestowitz. “So the corporations just moved. They became global corporations and they benefit tremendously from arbitraging their cost of labor. They love globalization. They don’t see their job anymore as having obligations to their workers and customers and communities. Now they feel their only obligation is to their shareholders. So they don’t feel responsible for what happens to the U.S. competitiveness. Their interests are not at all the same as the country’s interests.”

“The White House simply lacks the comprehension of what this is costing the economy and the country,” says Morici. “It just shows how little we are committed to this issue. Through three administrations, and 10 years, two of Bush and now Obama, we have been talking about this and doing nothing.

“The Chinese are increasing their welfare by taxing us,” says Morici. “It reduces our output and increases theirs, and the appropriate response is a tax to push back. I don’t have trouble competing with the Chinese on the basis of free trade, but this is not free trade.”