China continues to act stubbornly against any pressure to let Yuan appreciate, giving rise to a currency dispute. The recent world's financial leaders have failed to reach agreement on how to contain an escalating currency dispute that has threatened to undermine global co-operation on economic recovery. Despite loud calls from the US and somewhat muted appeals by Europe, Japan, and other countries, the annual meeting of the International Monetary Fund did not succeed in pressurizing China to allow a prompt and meaningful rise in the value of its currency. However, officials attending the meet called on IMF to play a stronger role in monitoring how the policies of each member affect the others, which has active support of the US Administration. According to Eswar S. Prasad, a former IMF economist, "The outcome of the IMF meetings makes it clear that collective action remains an ideal rather than a reality."

However, a number of economists and some policymakers have warned of the dangers of a currency war in which other nations weaken the value of their currencies to better compete with China in the world market. Slow growth in Europe and the US has led to a surge of capital flows into faster-growing economies like India, Mexico, and South Korea, putting upward pressure on their currencies. It would be recalled that Japan, Brazil, and other countries have tried to limit their currency appreciation. Concern about currency-weakening applies to the US as well.

The Americans seem to be more keenly set to seek the balancing of the value of Yuan and do not seem to be resting content with whatever is happening at the international forum. There has been a steady build-up of tension with the US Congress going ahead with the bill, which would enable the US Administration to impose countervailing duties on the imports of Chinese goods.

CRFT Bill Still has a Long Way to Go

Concerning the move by US lawmakers, senior trade diplomats, speaking on condition of anonymity, said it was still early days to see whether "The Currency Reform for Fair Trade" bill becomes law. This is because it would need to secure support in the Senate big enough to override the possibility of a Presidential veto.

The thinking of some experts is that the US could make the case that a country - like China - was manipulating its currency, and that this was effectively an unfair subsidy under the global trade agency's accord on subsidies and countervailing measures. But this would also require the US Treasury to determine in advance if there was manipulation, and then to request the International Monetary Fund - which has primacy on such matters at the global level - to find a similar determination.

Going down such a path, however, say some analysts, could derail the fragile international monetary system, which is still struggling to recover from the recent financial meltdown and the recession. And they believe that in the end, cooler heads will prevail in both Washington and Beijing, averting a potentially costly trade war.

US Textile and Garment Sector is a Divided House


In a separate development, China currency legislation being considered by Congress has divided textile makers and apparel importers over its ability to create jobs and economic growth. The bill, which was voted, would give US companies the ability to defend themselves against Chinese currency manipulation by placing countervailing duties equal to the Chinese manipulation on imports of certain goods from China. The currency reform for Fair Trade Act is described as "an essential step" towards bringing textile and manufacturing jobs back to the US by The National Council of Textile Organizations (NCTO). But the American Apparel & Footwear Association (AAFA) believes it is "short-sighted" and would only serve to ignite a trade war between the United States and China. "The bottom line is that this bill would not create any jobs here in the United States and does nothing to force China to revalue its currency", explains AAFA President and CEO Kevin M Burke, who added, "If this bill moves forward, the only thing it will accomplish is to ignite a trade war between the United States and China at the cost of American jobs, including jobs in the US apparel and footwear industry."


Representatives for US apparel and footwear importers said that the legislation "primes the United States and China for a widening trade war" and that erecting additional trade barriers stifles US competitiveness in the global market. "The rhetoric associated with Congressional consideration of this legislation threatens American jobs, including jobs in the US apparel and footwear industry, while doing nothing to require China to revalue its currency," said Kevin Burke, President and CEO of the American Apparel & Footwear Association (AAFA). "Its implementation could put the United States out of compliance with its international trade obligations while subjecting American consumers to higher priced goods."


But NCTO President Cass Johnson believes that if China were to allow its currency to rise to market levels, "the textile industry in the United States would add thousands of additional new jobs and build or reopen dozens of plants." He added: "This legislation sends a clear message to China that it must abandon its 'beggar thy neighbour' currency practices. If China fails to rebalance its currency, this legislation provides US manufacturers and US workers the necessary tools to defend themselves against China's predatory practices." The bill would use US countervailing duty (CVD) and anti-dumping law to hit back at prolonged currency manipulation. It is aimed at countries like China, which allegedly aligns its currency to the US dollar at a below market rate so that its goods are less expensive in international markets.


A hearing of the House Ways and Means Committee examined the exchange rate policy of the People's Republic of China and its impact on the US - and comes in the wake of significant Congressional activity highlighting currency manipulation. Recently 130 members of Congress have sent a letter to the Administration calling for a tougher stance, including countervailing duties on Chinese imports while a group of US senators has also unveiled legislation - the Currency Exchange Rate Oversight Act of 2010 - urging action if it is determined that China is a currency manipulator.


There are also renewed calls for passage of The Currency Reform for Fair Trade Act, which would give US companies the ability to defend themselves against Chinese currency manipulation by placing countervailing duties equal to the Chinese manipulation on imports of certain goods from China.

 

Speaking at the Economic Policy Institute (EPI) earlier this month, three leading economists argued that around 1.5m jobs would return to the US soil if China stopped manipulating its currency to keep the Yuan artificially low. The EPI also found in a recently published report that 204m jobs were lost to China between 2001 and 2008, according to a release from the National Council of Textile Organizations (NCTO).


The US Treasury Department has until 15 April to make a decision on whether to label China as a "currency manipulator" when it releases a report on the currency practices of major economies.


China, Other Developing Countries React


Moreover, since International Monetary Fund economists have been unable to accurately determine the extent to which the Chinese currency is undervalued, any calculation by US Department of Commerce would be arbitrary and duties based on the calculation would be locked in for a year even if the value were to change during the interim.


Escalating trade tensions between China and the US - reflected with the passage of a bill by the US House of Representatives that aims to slap punitive measures on nations that manipulate their currency to gain unfair advantage - have also dominated a World Trade Organization (WTO) forum. During a WTO session reviewing the trade regime of the US, China's WTO ambassador, Sun Zhenyu, castigated the US for its lax monetary and fiscal policies and for increasingly resorting to protectionist measures to shield domestic industries.


The Chinese envoy said China was very concerned about the "continuous depreciation" of the dollar, and the growing US budget deficit, and said Beijing wants Washington to "take practical and responsible measures to prevent the dollar glut and maintain stability of the currency." He also slammed the US for resorting to double standards, and told delegates from 153 countries that while urging its trading partners to further open markets, "the US has adopted more restrictive and protectionist practices in its domestic market it provides huge subsidies and limits market access with peak tariffs and tariff escalations on exports from developing economies."


Brazil, India and the European Union also called on the US to shift away from protectionist practices many ushered in the recent economic crisis - and to slash high tariffs, and non-tariff barriers, to imports. In particular, India and Brazil, took aim at the high US tariffs in textiles, apparel and footwear, areas of priority export interest for developing countries. A report by the WTO on the US trade regime points out that - while the average applied US tariff for industrial goods in 2009 was 4.8%, for textiles and apparel they averaged 9.1 %, and some were as high as 37.8%.


The major trading partners also have called on the US to show leadership in the troubled stalled Doha global trade talks, and suggested Washington should moderate its expectations. The EU's top envoy, John Clarke, said the US needs to contribute more, and to be "realistic in what it seeks from others," in the WTO talks. Moreover, the world's major emerging powers - China, India, and Brazil - said the US should not try to seek to extract more selective market opening concessions, and warned such efforts would only continue the current stalemate, or even see it unravel completely.


The only and sane hope lies in the IMF taking a hard look at the valuation of various currencies and decide on the manipulative efforts on the part of the countries like China as also arm-twisting by countries like the US. But will it be able to play the role which truly belongs to it.


Originally published in The Stitch Times, Nov-2010.