China reacting to the recent policy development in Washington advised the US Congress on Thursday to stay away from a planned bill that might lead to tariffs on its exports, at the same time assuring additional reforms that would address concerns about an undervalued yuan. High-powered US Senators on Wednesday had proposed a tough new attempt to pressure China and other countries with ‘misaligned’ currencies. The Chinese foreign ministry spokesman Qin Gang in his statement maintained that such strategies would damage trade relations. China’s Foreign Ministry in its official statement said that the US lawmakers should not play politics or pressure China on its currency, the yuan.
China’s Foreign Ministry spokesman Qin Gang while addressing media has said, ‘We hope the American side, the US congressmen, can view from a strategic perspective the importance of healthy and stable development of China-US economic relations, appropriately deal with economic and trade frictions between the two countries, not politicize economic and trade issues, and not try to resolve issues by exerting pressure’. He further stated, ‘China has adopted a managed floating RMB (yuan) exchange rate regime and we have already begun reforms of the RMB exchange regime. The reform is ongoing.’ In addition, Premier Wen Jiabao has also said in his comments published on Thursday that monetary policies would be ‘moderately tightened’.
US policymakers and manufacturers argue that the yuan, also known as the renminbi, is undervalued by as much as 40 percent, making Chinese goods artificially cheaper, costing millions of American jobs, and contributing to the massive US trade deficit with China that, last year, shot up to more than $232 billion. While, China contends that US Firms make much of the profit from US-China trade and that Americans benefit from cheap goods. However, China had introduced a more flexible currency system in July 2005 after years of pegging its currency to the US dollar. And from then the value of the yuan has gone up by around eight percent.
The bill aimed at punishing China tabled after the US Treasury released its semi-annual report that stopped short of classifying China a ‘currency manipulator’. However, the report using its harshest tone maintained that China’s tightly controlled exchange rates had led to a variety of economic problems including a massive build-up in currency reserves that posed global risks.
Witnessing the Bush Administration turn aside Congressional appeal for China to ‘revalue’ its currency is stamping the fact that the White House walking a tightrope. Congress at one hand wants to take tough measures to punish China with full blow, whereas the White House is trying to achieve balance through persuasion and negotiations. On the other hand, Beijing has vowed to respond to any new measures, and some fear a downward spiral of protectionism if the bill succeeds.
If the bill is passed, it will certainly have far reaching consequences on global economy. First it would damage US-China trade relationship, and upset the enthusiasm of the Chinese to invest in the US. With the latest introduced bill, it becomes clear that China has become the favorite scapegoat in the same way Japan was 20 years back. Further, adopting a course of protectionism will not produce anything lucrative for US economy but will generate protectionism in other parts of the world. As a matter of fact, any attempt by the US to restrict market access or impose higher tariffs on imports is expected to inflame similar measures from other economies of the world.
In addition to it, China is a crucial buyer of US Treasury bonds, and that any indication of a repositioning away from this could push up US interest rates by forcing Washington to pay higher returns to attract investment.
