More Protectionism Likely
I agree with Michael Pettis that removing Larry Summers from the White House should be construed as a sign that the Obama Administration is poised to take a more populist tone with China.
In June I wrote (More on China, Trade and Protectionism):
I see the China issue as more of a backburner thing given the sovereign debt crisis in Europe and the recent understanding in policy circles that leading indicators are rolling over. I sense that Team Obama is more interested in ensuring the recovery sticks through November than in creating a political mess with China. That’s why people are talking about stimulus. I could be wrong but this explains my dovish answer to [BNN presenter]Paul [Waldie]’s question.
And since that time, there really hasn’t been a very populist tone to the Obama Administration’s rhetoric toward China. However, as the economy has stalled and trade figures have deteriorated, this will change. First come the rhetoric and preparation; only later, if the U.S. economy is in the doldrums after the mid-terms, will the follow-through turn to action.
For example, yesterday, Economist’s View noted:
In a recent late August press announcement, U.S. Commerce Secretary Gary Locke announced “proposed measures – especially focused on illegal import practices from non-market economies – that will strengthen trade enforcement and help keep U.S companies competitive. These steps support President Obama’s National Export Initiative (NEI), which aims to double exports in the next five years and support the creation of several million new jobs…
No official statistics will reflect this, but with this announcement, the restrictiveness of U.S. trade policy just got measurably stricter. Other countries will certainly take notice, and so the likelihood that other countries follow suit, especially in this period of economic uncertainty, is fairly high.
I see this as an example of ground work being laid to back up trade rhetoric with action. On the rhetorical side, Secretary Geithner, as the last remaining senior member of Obama’s economic team, is well-positioned to speak for official policy. And he has consistently been the most hawkish member of Obama’s team since inauguration (see here). Last week, he testified before Congress as follows:
The undervalued renminbi helps China’s export sector and means imports are more expensive in China than they otherwise would be. It undercuts the purchasing power of Chinese households. It encourages outsourcing of production and jobs from the United States. And it makes it more difficult for goods and services produced by American workers to compete with Chinese-made goods and services in China, the United States, and third countries.
China needs to allow significant, sustained appreciation over time to correct this undervaluation and allow the exchange rate to fully reflect market forces.
Specifically, in evaluating progress two key factors should be the pace and extent of appreciation and the level of ongoing intervention required to slow the rate of appreciation.
Secretary Geithner went through a number of points beyond those quoted. Read the full text here. My read on his comments is this:
Out of good faith, this year we decided not to label the Chinese currency manipulators. However, we have been disappointed as the Chinese have not reciprocated. We are now prepared to take action against China. At a minimum, we are definitely going to label China a trade manipulator next year unless it re-values its currency significantly. We are also prepared to take other measures to protect ourselves.
The Chinese publicly rejected this framing of the China-U.S. trade relationship. Nevertheless, it is clear they are moving to damage control. Here are two ways.
- The revaluation of the Yuan has accelerated. The Chinese wanted to make sure this happened before the next G20 conference in October in order to pre-empt any talking points to the contrary.
- The Chinese are buying yen-denominated assets. In order to alleviate the bilateral Sino-American tensions, the Chinese have started to diversify their reserves out of US. dollars and into Japanese yen. I first wrote about this in July. While this has worsened Sino-Japanese ties, it has forced the Japanese to intervene unilaterally in the forex market, something that even the Europeans have condemned.
Will this be enough? Most certainly not. The Chinese have made a number of good tactical moves. But this only delays the inevitable. If the Democrats lose the mid-terms and/or the U.S. economy weakens, expect a move by the U.S. sooner than later.