U.S. Treasury Secretary Timothy Geithner didn’t speak softly when appearing before Thursday’s U.S. Congressional committee hearings on whether the U.S. should impose trade sanctions on China on the grounds that its currency policy amounted to an illegal export subsidy. But he also didn’t say he would be immediately reaching for the big stick to get Beijing to let its currency rise. “The pace of appreciation has been too slow and the extent of appreciation too limited,” he told increasingly impatient American lawmakers. “We have to figure out ways to change behavior.”
The Obama administration has an uncomfortable path to go down while it figures. Washington politicians, in the midst of a mid-term election season being shaken up by anti-incumbent Tea Party activism, are becoming shriller about the perceived effects on the U.S. economy of China’s exchange rate policy, even though, as Chinese officials and Geithner himself point out, letting the yuan appreciate won’t in itself reduce the U.S.’s deficits. Nor its unemployment rate, come to that. Or at least not unless the appreciation is of an unimaginable order of something like 50%. The world economy is anyway not robust enough to stand the shock that that scale of adjustment would have on China’s labour-intensive industries were it to come about in short order, not that Beijing would let it. China’s central bank has repeatedly spoken of the need for currency stability, and warned of the risk of commodity and asset bubbles in the event of a rapid appreciation of the yuan against the dollar.
The central bank has been as good as its word. The yuan has risen less than 2% since it was unpegged from the dollar in June, nearly a half of that coming in the week ahead of this week’s Congressional hearings, on which Beijing was well briefed by visiting U.S. officials such as Larry Summers last week. Geithner on Thursday tried to distance the administration from Congress’s wilder animal spirits, saying that the new proposed legislation on trade sanctions was a “complicated” idea that needed further study; similarly he will resist naming China as a currency manipulator in the U.S. Treasury’s next biannual foreign exchange report, due in October ahead of the G-20 Seoul heads of government meeting, a declaration that would automatically trigger punitive measures.
With the U.S. economy recovering from the global financial crisis only slowly, and likely to be facing an extended period of sub-par growth the last thing the Obama administration wants is a trade war to further complicate the U.S.’s relationship with China that has so many potential points of tension already. What it prefers to do is push trade complaints into the slow lane by sending them to the World Trade Organisation, as it did with two new cases earlier this week. Two can play that game, though. Beijing would likely lodge a WTO complaint about the proposed Murphy/Ryan and Schumer/Graham bills before the U.S. House and Senate respectively.
That is, self evidently, a different timetable to the one on which American politics is now operating. Chinese officials may think they will be able to ride it out until November, and as always will be stubborn about being seen to be giving into foreign pressure. China, too, as we have noted before, has its own election timetable in play, in which the pace of economic recovery plays just as important a role as it does in the U.S., regardless of the different pace of growth in the two countries.
In truth, the U.S. cannot just devalue its way back to economic rude health. Washington isn’t alone in complaining about Beijing’s exchange rate policy. But fixing the global economy, and the huge imbalances that still exist within it, needs more than just a deal on exchange rates, bilateral or global, just as fixing America’s huge trade deficit with China will take more structural reform than the official Chinese buying missions that are being dispatched to the U.S. or pre-election grandstanding by worried American politicians.