Be careful what you wish for! The US-Sino currency dispute

<p><em>Viv Davies interviews Simon Evenett for Vox<br />
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<p><em>June 2010<br />
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<p><em>Transcription of an VoxEU audio interview [http://www.voxeu.org/index.php?q=node/5162]</em></p>
<p><strong>Viv Davies:</strong> Hello and welcome to Vox Talks, a series of audio interviews with leading economists from around the world. I'm Viv Davies from CEPR. It's the ninth of June, 2010 and I'm talking to Simon Evenett of Saint Gallen University about the recent Vox e book he edited titled &quot;The US Sino Currency Dispute: New insights from economics, politics, and law.&quot; I began by asking Simon why he thought the book needed to be written.</p>
<p><strong>Simon Evenett:</strong> The US and China have been disagreeing about the size of China's exports to the United States for a long period of time now. And in recent months this manifested itself in a much more acute set of accusations by the United States government and some leading analysts that China was manipulating its currency and had prevented adjustment in its exports through this means. Worse, the Americans have threatened or, at least some Americans have threatened to take trade sanctions against the Chinese imports. And as this dispute escalated, there was a real fear that this would be deeply unsettling at a time when the global economy was trying to recover from the crisis.</p>
<p>The book, then, sought to shed light on the different features of the crisis, and it became clear that there were not just economic issues to be discussed, but also the legality of the Chinese move as well as historical precedent which might help governments and analysts figure out the likely moves by the US and by the Chinese.</p>
<p>So we wanted to put together a comprehensive book which drew from these different perspectives so that readers could get all of the information they needed on this crisis in one place. And in some sense it's one stop shopping for the US China dispute.</p>
<p><strong>Viv: </strong>OK, well it seems like a confrontation between the US and China over this issue has so far been avoided. But, do you think such a confrontation is inevitable?</p>
<p><strong>Simon: </strong>I don't think it's inevitable, and I think both the Chinese and the American governments have got the good sense not to provoke such a crisis, but they're not the only players here. One has to remember that the US Congress is an important player. The US Congress by rights in the US constitution determines US tariffs. And so the US government, federal government, can say what it likes, but it has to take account of Congress's view here. And that, in some sense, is the challenging wild card which could upset the balance here.</p>
<p>Now, fortunately the Congress has not legislated higher tariffs yet and I think has been persuaded by different people that this would be unwise. But there's certainly a body of people within Congress who think that China has not cooperated on lowering its exports to the United States, and who in the run up to an election might find it politically convenient to advocate stricter measures against Chinese imports.</p>
<p><strong>Viv: </strong>Do you think it's an issue which might come to the fore during the G 20 meeting later in the summer?</p>
<p><strong>Simon: </strong>It was an issue which was going to be on the G 20's agenda, but because the euro has devalued so much against the Chinese currency, the Chinese are expected and will likely express reluctance to allow their currency to revalue against the dollar, because by implication it would worsen the devaluation compared to the euro, or the euro's devaluation vis a vis the Chinese currency. And as a result, the issue of the Chinese and their currency has gone off the sort of front burner of international economic policy, precisely because the Americans have accepted that the Chinese face a very difficult position vis a vis their exporters and Europe.</p>
<p>Now, should the euro turn around and begin to shrink them again, then I think you can fully expect American pressure to build up again. And don't forget, we have a second G 20 summit in November in Seoul and pressure may well be exerted in the run up to that particular summit. So it may not be this G 20 summit that this issue becomes the most important, but it may be one of the most important at the next G 20 summit.</p>
<p><strong>Viv: </strong>Yes. OK, well, perhaps you can give us a brief overview of some of the main conclusions of the book.</p>
<p><strong>Simon: </strong>Certainly. With respect to the economics of the case against China, one of the matters which people have examined is the extent to which China's currency is misaligned, or valued incorrectly, or out of line with what it should be. And here the range of estimates for the Chinese misalignment go from 2% 27%. This is the range of, I would say estimates which people would, serious people would go to the wall defending. Now, that range of 2% 27% is just too wide to advise policy makers, and suggests that there's substantial scientific uncertainty as to just how much the Chinese have been manipulating their currency.</p>
<p>The second point that came through in the report was the many authors, including many Chinese authors, argued that revaluing the Chinese currency was actually in China's interests, and that China should so it for its own reasons, not because of US pressure. Revaluing the currency would help limit export increases. It would also help rebalance the Chinese economy towards domestic consumption, and would also help lower the price of imported goods and contribute to lower inflation in China. So for all these reasons, now there are good reasons why the Chinese should allow their currency appreciate against the dollar, and these are independent of the dispute.</p>
<p>We also found in the economic research that when China had let its currency appreciate before, that the competitiveness of Chinese firms responded and improved. So then you might think that currency appreciation puts some Chinese exporters out of business. Well, that may have happened but it also induced many other Chinese exporters to find productivity increases and to improve their products in such a way that overall Chinese export performance improved as a result of this exchange rate appreciation.<br />
And so here, one question one has to ask to the Americans is, &quot;If you feared Chinese exporters now you'll fear them even more after further appreciation of their currency.&quot; In short, &quot;Be careful what you wish for.&quot;</p>
<p>With respect to the WTO legality of the Chinese exchange rate regime, here the record is very, very unsettled. Many legal analysts are doubtful that the Chinese have violated their WTO obligations. And if they had, they would not be the only parties who have done so, since they are not the only parties who have fixed exchange rate regimes.<br />
Yet at the same time some people argue that the exchange rate regime of the Chinese constitutes or amounts to subsidies for their exporters and as a result is enforceable at the WTO. That matter has not been resolved. With respect to the historical perspectives on this, the record of the US trying to push other countries to reflate their economies is not good or at least not necessarily particularly relevant to this particular case. And as a result there is a strong sense that history does not justify what the US is trying to do at the moment. These are the main findings of the e book that we put out on the US Sino dispute.</p>
<p><strong>Viv: </strong>The political economy of these issues suggests to me that we ought to be seeing some substantial lobbying from firms who have interests in international trade. Has there been pressure from them?</p>
<p><strong>Simon: </strong>There ought to be very strong commercial interest in making sure that supply chains stay open and that the investments which many Western firms have made in low cost production in China remain viable. Yet interestingly, the lobbying in the US Congress does not appear to reflect this concern. If anything the Congress appears to be very impressed by the fairness arguments, or rather, the lack of fairness as it's perceived, of Chinese policies. And instead counter arguments don't seem to have much bite. And this is worrying because it does suggest that the outsourcing to China may well be jeopardized by a set of tariffs which the Americans could put in place.</p>
<p>Now you could argue, of course, that the American importers from China have assessed the political situation, seen that it's not likely to become too bad and have decided not to put too much effort behind lobbying on this issue. And that they may change their view in the future should pressure on China intensify. And that's an important caveat we should bear in mind.</p>
<p><strong>Viv: </strong>And you've spoken a little bit about the message for policy makers, &quot;Be careful what you wish for,&quot; et cetera. Could you tell us a little bit more about the main message coming out of the book for US and Chinese policy makers?</p>
<p><strong>Simon: </strong>Certainly. For US policy makers, the message very much is re think what the strategy is because the economic logic of it, the diplomatic logic of this does not seem to be particularly wise. Maybe the US federal government has come to that conclusion, and notes that really the issue is how to manage Congress on this issue. With respect to the Chinese there is a strong case for letting their currency appreciate on terms that they find conducive. And this process should begin at some point and that the Chinese should forget any ideas about retaliating against US measures because most of the tools they have for retaliation will harm themselves as much as they harm the Americans, such as selling off their own Treasury bills.</p>
<p>So it really is a call for calm on both sides. And for the Chinese to get on doing with the economic reforms they say they're committed to. And for the Americans to allow that process to happen and not to disrupt it by making big demands on China from time to time.</p>
<p><strong>Viv: </strong>And what do you see as being the main implications of this for European Union policy? What should we be pushing for here?</p>
<p><strong>Simon: </strong>Well Europe in many respects outsources more to China than America does on some measures. So in that sense the Europeans are very vulnerable to anything which disrupts trade between China and the European Union. The euro of course in recent months has declined against or fallen compared to the Chinese currency. And the Chinese have feared the loss of competitiveness in their own and in European markets. So if anything, the pressure has been taken a little bit off the Europeans in this regard. Should the euro strengthen against the Chinese currency, then I think we will see further thoughts given in Europe to the types of measures which the US Congress is considering.</p>
<p><strong>Viv: </strong>Finally, Simon, the world economy has plenty of rules for countries that run substantial or recurring current account deficits. But in contrast, means of adjustment for countries running persistent surpluses are less evident. What are the implications of this and what can or should be done to address it?</p>
<p><strong>Simon: </strong>You're right. The global economy effectively has rules on deficit countries. They are the countries which have to go to the IMF and subject themselves to different types of obligations. And these deficit countries in some sense are constrained once they seek the IMF's help. Surplus countries of course have no pressure on them to adjust their policies. And so you end up with a situation where you can have some countries like China facing no serious external pressure to adjust, other than the diplomatic pressure we've discussed earlier, or at least no systemic pressure to adjust. And so they carry on behaving as they are.</p>
<p>Now some might also argue that Germany and Japan fall into this category as well. So it's not just a Chinese phenomenon. China isn't the only country with a trade surplus. And some of us have begun to worry more that the global imbalances question is linked to the lack of symmetry in the pressure to adjust on countries, debtor countries face more pressure than surplus countries. And this in turn raises questions as to whether or not there should be a modification to the International Monetary Fund's rules to encourage surplus countries to adjust.</p>
<p>And that's a topic which that the CPER and the World Bank are collaborating on at the moment and will have an ebook prepared for before the G 20 summit in Canada this month. And as a result, users and viewers may want to download that book when it becomes available and see what suggestions have been put in the public arena for facilitating adjustment by surplus countries as well.</p>
<p><strong>Viv: </strong>And that's global rebalancing ebook, is that correct?</p>
<p><strong>Simon: </strong>Yes, this book will be on global rebalancing, will be out soon.</p>
<p><strong>Viv: </strong>Well, Simon, it's been very interesting talking to you today. Thanks very much for sparing the time.</p>
<p><strong>Simon: </strong>Thank you, Viv.</p>
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