1 responses to “Geoff Dyer, “Geithner softens his stance on China””

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  Jeffrey Beckington May 27th, 2010 at 06:12

  STABILITY AND SOVEREIGNTY – CHINA’S FLAWED REASONING
  FOR THE RENMINBI’S ENFORCED UNDERVALUATION

  In advance of the U.S.-China Strategic and Economic Dialogue held in Beijing on May 24-25, 2010, China’s government emphasized, as it has on any number of other occasions in the past, that stability of the renminbi’s exchange rate is essential to ensure economic stability and that setting an exchange rate is a sovereign issue for each country to determine according to its own situation. China’s Minister of Commerce, Chen Deming, was reported last week to have said that exchange-rate stability is most important now during the current global financial crisis, not only as a Chinese national responsibility, but also as a responsibility for global economic recovery.

  It’s difficult to accept, however, China’s twin grounds of stability and sovereignty as persuasive justifications for China’s rigid pegging of the renminbi to the U.S. dollar. As Harry Dexter White observed shortly after helping the United States to negotiate the establishment of the International Monetary Fund at Bretton Woods in 1944, “The difference between stability and rigidity in exchange rates is the difference between strength and brittleness. It is the difference between an orderly adjustment, if conditions warrant it, and eventual breakdown and painful adjustment.” As White also remarked at that time, the lowering of barriers to international trade depends upon assurance of orderly exchange rates and freedom in exchange transactions for trade purposes, because depreciation in exchange rates is an alternative way to increase import tariffs, while exchange restrictions are another means to apply import quotas.

  Rather than serving as a source of economic stability, therefore, China’s single-minded imposition of a rigid exchange rate between the renminbi and the U.S. dollar has been, and continues to be, a significant contributing factor to massive and unprecedented imbalances in trade and investment across national boundaries. While other factors are at play in this complex situation, economic improvement in the United States and globally will not take place without valuation of the renminbi being determined by market fundamentals. More rigidity in the renminbi’s valuation will lead only to more extreme and dangerous imbalances and instability and will not assist a global economic recovery.

  This rigidity in exchange rates also is not an unfettered sovereign right of China or any other country as China would have. If that premise were true, every country under China’s thinking would be free to follow China’s lead and peg its currency as China has pegged the renminbi. Such rampant competitive currency depreciation between the two World Wars was terribly destructive, and going down that path again makes no more sense now than then.

  In addition, China and all other members of the International Monetary Fund and of the World Trade Organization have, in fact, ceded some sovereignty over their currencies and trade for the sake of achieving improved, sustainable standards of living for all people. Article IV of the IMF’s Articles of Agreement, for example, and Articles VI and XV of the WTO’s General Agreement on Tariffs and Trade all contain obligations and restraints under public international law designed to avoid currency manipulation, subsidization, and the kinds of currency-related trade barriers that Harry Dexter White recognized as counter-productive to the flow of goods and services across national boundaries. In June 2007, the IMF underscored these obligations by adding as a fourth principle to its guidelines in this area that members of the IMF should avoid exchange-rate policies that result in external instability.

  In its Protocol of Accession to the WTO in 2001, China said that it had adopted a floating exchange rate regime based on supply and demand. It is hard to square that characterization with the reality of China’s insistence on chronically undervaluing the renminbi by means of protracted, large-scale intervention in the exchange markets. This behavior by China is generating instability outside China, not stability, is at odds with the international legal commitments China has undertaken at the IMF and the WTO, and ultimately is not sustainable even for China.

  The ideal here is a multilateral arrangement that would effectively curb competitive currency depreciation by any country. Reaching such a consensus, however, will be impracticable as long as China persists in deliberately undervaluing the renminbi. Both as a step toward a stronger international system and as part of an enforceable international regime, therefore, it is important that countervailing and antidumping duties be employed in a WTO-consistent manner to offset this debilitating practice when U.S. domestic industries are injured by protectionist undervaluation of the renminbi or any other country’s currency.