By Dan Steinbock (China Daily)
BEIJING, Feb. 17 -- Debate on the Chinese currency reflects the rising ambivalence about free trade and the new pressures of financial protectionism.
"President Obama - backed by the conclusions of a broad range of economists - believes that China is manipulating its currency," noted new U.S. Secretary of Treasury, Timothy F. Geithner in late January, hinting at a harder line on U.S.-China relations.
Only a week later, however, Vice President Joe Biden said that there had been no judgment in the administration over currency manipulation.
During the past eight years, the Bush administration avoided the term "currency manipulator," even when it had disagreements with China. The Obama administration's real litmus test will follow in April, when the administration is required by a 20-year-old trade law to report to Congress on exchange rate issues.
If the report deems China is engaging in "currency manipulation," such a finding would begin with a legal process that starts with diplomacy but could trigger the imposition of trade barriers and end in a trade war.
Unsurprisingly, Geithner's statement was in response to a question by Senator Charles E. Schumer, a vocal Democratic critic of China's currency policies.
The story goes back to the presidential primaries in the summer of 2007, when senators Barack Obama and Hillary Clinton agreed to co-sponsor controversial legislation that would have permitted US companies to seek anti-dumping duties on Chinese imports, based on the undervaluation of the currency.
Initially, the bill had been crafted by a bipartisan group of senators, including Senator Schumer. It called for a trade case to be brought by the U.S. at the World Trade Organization. It would also have applied 27.5 percent tariffs on Chinese goods and violated international trade rules.
At the time, Senator Obama criticized what he called "China's currency manipulation," urging U.S. Treasury Secretary Henry Paulson to take action against China.
Well, that was two years ago, when the world was a very different place. The global economy was not on the edge of a financial meltdown and the US banking system was not yet technically insolvent.
Recently, the IMF's chief, Dominique Strauss-Kahn, said the world's advanced economies - the U.S., Western Europe and Japan - were "already in depression," and that the IMF could further slash its global growth forecasts. "The worst cannot be ruled out," he added.
Now President Obama and Secretary of State Hillary Clinton are in a position to implement their campaign pledges, if they so decide.
However, those pledges made little sense in 2007. Today, they make no sense.
According to some members of the U.S. Congress, "currency manipulation" gives Chinese producers an unfair advantage against their American rivals by making Chinese imports artificially cheap and U.S. exports to China more expensive.
The assumption is that the depressed U.S. manufacturing output and the destruction of U.S. jobs is due to currency manipulation.
However, there is no commonly accepted definition of currency manipulation. Also, China is among the 50 percent of IMF members that fix their currencies, and its central bank has been gradually moving toward a more flexible arrangement.
The global financial crisis was triggered by the U.S. subprime mortgage crisis, and the ensuing credit squeeze - not by the renmibi.
Cheap imports from China have not been the primary cause for the decline of the manufacturing output or job losses in the U.S. economy.
