America’s Shocking Shock
The panic-stricken US textile industry and the congress have made it the case that the onslaught of Chinese textile inflows disrupted the domestic market, and may apply a clause in WTO granting them the right to impose tariffs on the imports, unless the Chinese revalues its yuan within some months. The quick-fix of protectionism is so seductive that one would rather take the easier and short-sighted path, than to swallow bitter pills.
Fed Chairman Alan Greenspan and the academics have repeatedly acknowledged that even a 20% rise in yuan will do little in addressing the US record current account deficit of $666 billion, assuming the manufacturers would turn to domestic producers after yuan revaluation. Common sense tells us this is never the case. At most the businesses will just move to other low-cost countries, and US trade deficit continues but vis-à-vis different countries. And how long can they hope to rely on the special clause, which is meant only to deal with extreme situation?
More fundamentally, is the surge in import volume a real surge? I would say no. The real picture is, in the past, import quota has artificially suppressed the number of import items. A WTO agreement 10 years ago stipulated the quota to be scrapped on 1 Jan 2005. The industry has one decade to adjust and adapt itself. Thus, the current overwhelming shock at the sight of Chinese textile imports returning to its normal level is itself, shocking. It makes one wonder what the people have been doing all the time. Among other things, the US has been accusing the Chinese of manipulating its currency and exports to gain an unfair edge. Is maintaining the decade-old peg at 8.38 yuan per dollar without a touch considered manipulation? I am not sure. Perhaps the Chinese had foreseen all of these 10 years back. If anyone were to be accused of manipulating, the suppression of import volume first comes to my mind.
Worst, this protectionist sentiment breaks out at a time when China is painstakingly reforming its state-owned banks, preparing itself for the imminent opening of its banking sector to foreign competition. Watching the Americans crying foul on free trade, what the Chinese will feel under persuasion of the Government to comply with WTO rules?
Is the repercussion of yuan float well understood? What supports US’ today extravagant expenditure, amongst all, is yuan’s fixed peg to the dollar. To maintain its undervalued currency, the Chinese sells yuan to buy US dollar, and in turn use it to hold treasuries. When yuan is floated, its demand for US treasuries to keep the peg virtually vanishes. Is US ready for a possible plummet in its dollar and asset prices? With its budget and trade deficit skyhigh, I don’t think it is time for the US to break down this mechanism that helps maintain its dollar value.
The US should not blame others for its inability to manage its own house. It is imperative that the institutions hold on to tight fiscal discipline as what their ancestor administrations had demonstrated. Meanwhile, encourage saving among its citizens before requesting others for collaboration in policies.
June 18th, 2005 at 1:32 am
it’s called “protecting the nation’s interest”. coutries use political and military power to fuel its economy. how many developed nations really rose to economic prominence solely through good fiscal policy while abiding to rules of fair trade?