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Recent talks with Chinese ended last week with the
feeling that we have gained little ground. And with good reason. Only the US sees the
growing trade deficits and the dollar-Yuan peg as a problem of growing
importance.
The Chinese general/philosopher Sun
Tzu once wrote “. . . If you know the enemy
and know yourself, your victory will not stand in doubt, if you know Heaven
and know Earth, you may make your victory complete”. He seemed to be
offering rather pointed advice several thousand years removed on how
negotiations with the US should proceed.
The topics on the table are important, at least to the US negotiators.
But the issues seem less so to the Chinese who, represented by Vice Premier
Wu Yi, left both the White House and Congress frustrated by the seeming lack
of interest in the subject.
The US wants the same thing it has always wanted: concessions. The
topics discussed at the most recent meeting by these two global giants have
focused on the tight control the Chinese have kept on the Yuan and the ever
burgeoning trade deficit the US believes is attributable to the perceived
undervalue of that currency.
Congress has made it clear that the situation is not tolerable and
seeks to stem the imbalance by imposing duties on imported goods. This stance
is seen as a vague attempt by the lawmakers to prompt the Chinese to allow
their currency to adjust itself naturally on the open market.
The Yuan however is not the problem. There is no real proof that the
sovereign regulation of a country’s own currency has any impact on the
balance of trade between other nations. The People’s Bank of China
prints money to control short-term interest rates within its borders. These
rates help regulate their economy using them in the same fashion as the
Federal Reserve.
These internal controls have little effect on trade deficits. The
Chinese produce goods and the US buys – often on credit, over $233
billion worth. And this is where the members of Congress see the source of
the problem.
The US
contends that the PBOC prints money for a different purpose. They contend
that the Chinese are using their cheaper currency to buy dollars and then buy
dollar denominated assets. While this may be perceived as trade adverse, the
Chinese and most economists see the problem differently.
It is important to remember that the Chinese view the US as a mature
economy with a banking system with a strong network of banks whose link helps
control the nation’s economic health. This close association allows our
institutions to make risk-adjusted decisions about credit. The Chinese do not
yet have that sort of infrastructure in place. Their meteoric rise in the
global marketplace has exposed some flaws when held against similar banking
structures in other countries. Removing the dollar-Yuan peg will offer little
in the way of an equitable fix especially from the Chinese point of view.
Pushing China to change is largely a waste of time. There are three
reasons for this. China has a low-wage workforce at its disposal comparative
to much more mature economies in the US and Europe. This is one of the most prominent reasons behind
the trade imbalances.
I mention Europe at this
point in the discussion for a good reason. Much to the dissatisfaction of the
US, the Yuan is allowed to float against the Euro. The same type of trade
imbalance exists there as well. If you were to do a side-by-side comparison
over the last ten-years, you would notice that the amount of exports from
China to Europe have grown almost in tandem with the US.
The second reason the US
should drop their zealous effort to fix this currency issue portrays a basic
misunderstanding of where the Chinese are right now. The only link the PBOC
has with the economy has comes with their attempt to regulate is what is
called nominal prices.
Supply and demand regulates
nominal prices by putting pressure on nominal exchange rates. Nominal prices
are described as a monetary unit. When nominal prices are used as the PBOC
does, the math becomes much simpler allowing currencies to be exchanged in a
straightforward manner. Comparative advantage, the US should note, affects
the rest.
And lastly, efforts by
the US to force the Chinese to shift their policies could precipitate a
possible currency collaboration with other Asian nations. This would benefit
China’s smaller neighbors, whose economies are equally immature and
whose labor force may be seen as a threat to the competitive advantage the
Chinese have internationally.
Such Euro like
affiliations would not serve the US interests and would make Congressional
pressures concerning duties and the Treasury department’s repeated
request to float their currency a moot point.
Paul Petillo
www.BlueCollarDollar.com
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