may you live in interesting times: looming conflict with china philip i. levy may 24, 2010
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May You Live in Interesting Times: Looming Conflict with China
Philip I. Levy
May 24, 2010
U.S. economic relations with China
What happened this year? Forces driving the U.S. debate Forces driving China Policy options and perils
What in the world…?
Landmarks of the last year– China’s not a currency manipulator, but the currency
does not budge– The Group of 20 (G-20) pledges to rebalance the
global economy– Trade deficits shrink– U.S. protection irritates China
What in the world…?
Landmarks of the last year– China’s not a currency manipulator, but the
currency does not budge– The Group of 20 (G-20) pledges to rebalance the
global economy– Trade deficits shrink– U.S. protection irritates China
One episode of appreciation
What in the world…?
Landmarks of the last year– China’s not a currency manipulator, but the currency
does not budge– The Group of 20 (G-20) pledges to rebalance the
global economy– Trade deficits shrink– U.S. protection irritates China
World Current Account Balance in 2009billions of dollars, IMF World Economic Outlook, April 2010
What in the world…?
Landmarks of the last year– China’s not a currency manipulator, but the currency
does not budge– The Group of 20 (G-20) pledges to rebalance the
global economy– Trade deficits shrink– U.S. protection irritates China
U.S. Monthly Trade Deficitbillions of dollars, annual rate, U.S. Census Bureau
The politically significant number
The politically significant number
China’s global imbalance
U.S. protection irritates China
Persistent irritation about “Buy America” Annoyance at increased use of antidumping
and countervailing duty– Though the Obama administration had no choice
Outright anger at the Section 421 safeguards case on Chinese tires– Though the Obama administration tried to split the
difference
Forces Driving the U.S. Debate
UnemploymentPoliticsThe need for
cooperation
U.S. unemployment rateBureau of Labor Statistics, 2008 to present
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Un
em
plo
ym
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ate
Experts chime in
Competing claims on how badly the U.S. has been hurt– Fred Bergsten: 1.0 million jobs lost– Paul Krugman, NYT: 1.4 million jobs lost– Rob Scott, EPI: 2.4 million jobs lost
Bergsten: persuading China to boost the value of its currency would be "by far the most cost-effective possible step to reduce the unemployment rate and help speed economic recovery" in the United States.
U.S. Manufacturing Employment
From 2005-2008 when the RMB was rising, ultimately by 20 percent or so, there was no increase in U.S. manufacturing employment at all (and deficit grew).
Virtually all wealthy countries have seen a long-term decline in manufacturing employment. The same thing has happened in Europe and most of Asia. Trends are not different in chronic trade-surplus countries like Japan.
Contrarian: Ray Fair, Yale
The U.S. gained 57,000 jobs from Chinese currency undervaluation.
He sees increased demand for U.S. goods as Chinese imports become more expensive. But offsetting effects as well: decreased Chinese output and imports; increased U.S. prices; decreased U.S. wealth and wages; increased U.S. interest rates. He finds the latter effects more than outweigh the former.
Political imperative
JOBSElections looming in November
Important interactions with China
Potential for war on the Korean peninsula U.N. sanctions on Iran Global climate talks G-20 summitry Important financier for U.S. borrowing
Forces Driving China
A new haughtiness
PoliticsEconomic
uncertainty
China’s growth performanceIMF - estimates beyond 2008
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2003 2004 2005 2006 2007 2008 2009* 2010* 2011* 2012* 2013* 2014* 2015*
Year
Perc
enta
ge g
row
th R
ate
Chinese politics
Leadership change in 2012 Legitimacy through economic achievement and
nationalism, no longer ideology Division on currency
– People’s Bank leads charge for currency appreciation
– Ministry of Commerce leads charge against
No one wants to appear weak
China’s worries
Excessive bank lending Inflation
– Reports of annual property inflation over 50% in Beijing and Shanghai, links to past unrest
Stock bubble– The Shanghai Composite Index has declined 17 percent this
year, the world's second-worst performer among the 93 gauges tracked by Bloomberg (China Daily, last week)
Europe– China’s biggest export market: 19.7 percent – Lending and export freeze redux (threat of unemployment)
One episode of appreciation
A different perspective: cross-rates
yuan/euro
The clock is ticking
House Ways and Means Chairman Sander Levin:If China fails to increase the value of its currency by the last week of June, the Obama administration and the U.S. Congress will be forced to take unilateral steps in response.
What would we like China to do?
Quick, one-shot appreciation: 25-40 percent– May cause turmoil within Chinese economy– Financial system ill-prepared for major resource
shift
Gradual appreciation, e.g. 6 percent per year– Follows precedent– No dramatic short-term effects
American Chamber of Commerce - Shanghai survey
Today’s News from Beijing
President Hu Jintao:– “China will continue to steadily advance reform of the renminbi
exchange rate formation mechanism following the principles of being independent, controllable and gradual.”
Secretary Tim Geithner:– “We welcome the fact that China’s leaders have recognized
that reform of the exchange rate is an important part of their broader reform agenda.”
Interpretation:– Zhang Xiaoqiang, vice chairman of the National Development
and Reform Commission: China’s “basic principles” of exchange rate policy were unchanged. (Financial Times)
Policy options on the table
1. Wait patiently for China to change
2. Try to reach multilateral agreement on rules for exchange rate behavior
3. Name China a currency manipulator
4. Press a case at the WTO
5. Use countervailing duty measures
6. Apply a unilateral tariff, perhaps 25 percent
What happens next?
Open for discussion!
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