Why some economists see a looming US-China trade war
| Beijing
The storm clouds gathering over America鈥檚 trade relations with China darkened this week, prompting some observers to warn of a coming trade war between the world鈥檚 two largest economic powers.
As Treasury Secretary Timothy Geithner openly criticized China for keeping its currency undervalued, angry congressmen urged legislation that would punish China for artificially boosting its exports.
Adding to the threatening drumbeat, Washington lodged two new complaints against China at the World Trade Organization (WTO), charging that 鈥淐hina is breaking its trade commitments to the United States and other WTO partners,鈥� according to a statement by US Trade Representative Ron Kirk.
These are all signs that major imbalances in world trade 鈥� where the US has the biggest deficits and China has the biggest surpluses 鈥� 鈥渕ake it inevitable we are going to end up in a messy situation,鈥� says Michael Pettis, a professor of finance at Peking University in Beijing.
[Editor's note: The original version misidentified Mr. Pettis's current job title.]
Mr. Geithner spoke more clearly than ever before about US frustrations with the snail-like pace of Beijing鈥檚 moves to strengthen the value of its renminbi (RMB) currency.
鈥淲e are concerned, as are many of China鈥檚 trading partners, that the pace of appreciation has been too slow and the extent of appreciation too limited鈥� he said. 鈥淲e would have to see a very substantial change over time for that judgment to change.鈥�
Since Beijing stopped tying the RMB to the US dollar last July, the Chinese currency has increased in value by about 1.5 percent. Some congressional critics of Beijing have claimed that the currency is overvalued by as much as 40 percent.
Geithner cautioned, however, against taking any steps that could spark retaliation from one of America鈥檚 most important trading partners.
Skepticism that a stronger RMB would reduce trade deficit
Some American economists say that boosting the value of the RMB, which would make Chinese exports more expensive abroad and US imports cheaper here, would help shrink the US trade deficit with China.
But the Chinese government warned against outside efforts to accomplish that. Foreign Ministry spokeswoman Jiang Yu said Thursday that 鈥減ressure cannot solve the issue. Rather, it may lead to the contrary.鈥�
Leading Chinese economists have also cast doubt on US critics鈥� reasoning. At a conference Tuesday, Ding Yifan 鈥� an economist with a think tank that advises the Chinese government 鈥� warned that Washington would be unwise to touch off a trade war with its fastest-growing export market.
Nor is it clear that even a large appreciation in the value of the RMB would reduce the US trade deficit with China, argues Xiang Songzuo, deputy head of the International Monetary Institute at Beijing鈥檚 Renmin University.
In the three years before Beijing pegged its currency to the US dollar in July 2008, the RMB gained more than 20 percent against the dollar, he points out, 鈥渂ut the US trade deficit with China did not decrease. It increased.
鈥淎 policy of currency appreciation will not be of significant value to the US,鈥� he insists.
Still, China 'reluctant' to enter a trade war
Even so, Prof. Xiang says, 鈥淐hinese leaders would be very reluctant to enter a trade war鈥� with the United States. 鈥淎merica would also lose from such a war, but China worries more鈥�, he adds.
That, he says, is because although Beijing is trying to derive more economic growth from domestic consumption, China鈥檚 economic performance is still heavily dependent on its export sector.
鈥淓xport industries employ so many people, and a drop in exports would mean a rise in unemployment which could cause very serious social unrest,鈥� Xiang argues. 鈥淪ocial stability is Chinese leaders鈥� top priority, and the way to achieve it is fast economic growth to keep people working.鈥�
