[NOTEBOOK]Political basis of the yuan debateWashington’s most urgent concern is not limited to the post-war reconstruction of Iraq. Another hot potato is the yuan.
During his visit to China early this month, U.S. Treasury Secretary John W. Snow demanded that Beijing end the currency’s fixed rate against the dollar, claiming that the yuan has been artificially undervalued. Mr. Snow practically pressured Beijing to shift to a flexible exchange rate system, where the market determines a currency’s value.
The U.S. Congress is even more aggressive. A group of Republican and Democratic senators have submitted a bill to impose tariffs on Chinese imports, arguing that China has enjoyed an unfair advantage thanks to the currency peg. Two other similar bills are pending at the moment. The National Association of Manufacturers is considering filing suit against China for the alleged trade violation.
Last year, the U.S. trade deficit with China was $103 billion. China is one of the largest exporters to the United States and has gained the most from trade with the United States. In July alone, China had an $11.3 billion surplus; at this rate, China is expected to gain $130 billion from trade with the United States this year. Statistics show that 2.6 million jobs have disappeared in the United States since January 2001.
While politicians talk about a reviving economy, the recovery has not been confirmed. Americans cannot expect a solid economic rebound before next year’s election. After all, politicians, especially U.S. President George W. Bush, desperately need a scapegoat, the most convenient choice being the yuan. They have argued that a cheap yuan is eroding American industry and destroying jobs.
We have seen a similar situation before. When the United States was suffering from a skyrocketing trade deficit with Japan, the finance ministers and central bankers of France, Germany, Japan, the United Kingdom and the United States, the G-5, met at the Plaza Hotel in New York in September 1985.
The so-called Plaza Accord stated that “some further orderly appreciation of the main non-dollar currencies is desirable,” virtually forcing the appreciation of Japanese yen. By the end of 1985, the Japanese currency had strengthened 30 percent against the dollar but the United States failed to reduce its trade deficit. Exchange rates were not solely responsible for the large trade deficit; other factors such as trade barriers and capital regulation contributed as well.
While some Japanese might have been secretly content that the United States had virtually admitted economic surrender to Japan by asking for a currency appreciation, Japan was completely isolated at the time. The U.S. offensive against Japan was aggressive and unilateral.
Like the yen in the 1980s, the Chinese yuan is indeed undervalued. But the U.S. approach in pressuring the yuan is somewhat different.
International credit rating agency Standard & Poor’s recently warned that the issue needed to be handled with extra care because it could destabilize the Chinese economy, and consequently the global economy.
The Wall Street Journal said that the priorities should be clearing China’s insolvent debts and overhauling the financial market. The financial newspaper also recommended a gradual transition to a flexible exchange rate system, and reminded the Bush administration that China was still a developing country.
Some Chinese advocates say that China’s overall trade balance is moving toward equilibrium and therefore the yuan was not undervalued. Manufacturing still makes up 40 percent of the U.S. gross domestic product, and improved productivity is responsible for the declining number of jobs in the manufacturing sector, not Chinese imports.
Much of China’s gain from exports to the United States has gone to American corporations that made direct investments in China. Even within the United States we hear voices backing China’s position.
The reasoning is simple. There are American companies whose interests depend on China’s economic stability.
In the last four years, $180 billion has poured into China as foreign direct investment. The booming economy has put upward pressure on the yuan.
But the future of the Chinese economy is no longer a concern of the Chinese people alone, but of Americans as well.
From the debate on the yuan, Koreans can learn how we can safeguard our own economic security.
* The writer is international news editor of the JoongAng Ilbo.
by Lee Jae-hak