Despite all their tough talk, Sens. Schumer and Graham have postponed a vote on their bill threatening punitive tariffs against China until at least September. They did so just two hours after two other senators, Charles Grassley (R) and Max Baucus (D), proposed an alternative bill that would leave it up to the Treasury Department to determine if China is a currency manipulator (the theory being that China's undervalued yuan gives Chinese companies an unfair advantage against American firms). But instead of waving around the big stick of tariffs, Baucus and Grassley's bill would kick in a much milder set of sanctions.
So who blinked in this game of trade war chicken? Last week, Morgan-Stanley chief economist Stephen Roach was telling us that Schumer wanted to go down in history as the man who made China back down. And even though China has made no obvious, immediate concessions, he's still talking the tough talk, according to Reuters. "We believe if we hadn't introduced this strong medicine, nothing ever would have happened. But we also believe that now that we're on the path to progress, we don't have to fire this so-called nuclear weapon, but can hold it in abeyance as we carefully watch and wait and expect continued progress," said Schumer.
The Financial Times quoted Schumer as saying that his recent trip to China had educated him. "The Chinese see the fact that manipulating their currency cannot continue," said Schumer. "We learned that the Chinese have come to the conclusion that a fixed currency is no good for China."
It's never a wise idea to take a politician's words at face value, but let's entertain a radical thought. In a report on his own recent trip to China published Monday, Stephen Roach lays out a detailed explanation of why he thinks China's leaders are making all the right moves to transition China from export-dominated growth to more stable, domestically driven growth. Could it be possible that China's leaders likewise convinced Schumer and Graham that their long-term plan for China's economy was sane?
There are a host of reasons to loathe China's leaders: their ongoing crackdown on dissent, their saber-rattling with respect to Taiwan, their refusal to allow any real democracy. But if they successfully steer China's economy in the direction outlined by Roach, the implications for the world economy would be vast, and positive.
Right now, it is easy, and quite true, to see China as the offshore headquarters of the world, where rapacious multinationals exploit cheap labor at the expense of all the rest of the world's workers. But China's leaders see this as just a stage. They have no long-term desire to be the world's one-stop shop for exploited workers. They aspire to follow, on a grand scale, the example of Taiwan and South Korea, where export-led growth led to the development of mature, highly dynamic economies. Judging by Roach's analysis, they are as unhappy with the current balance of trade with the U.S. as the U.S. is. They know it's unsustainable, and they know that for long-term growth -- not to mention global peace and stability -- they've got to move the Chinese economy away from its overdependence on exports.
Did they convince Schumer and Graham that their commitment to gradually revaluing China's currency is real? China's central banker Zhou Xiaochuan is quoted by the Journal today as saying that Chinese companies "have adapted smoothly" to the 3 percent appreciation of the Chinese yuan that has occurred since last July, and that "market forces could be allowed gradually to play a greater role in the floating exchange rate." Wouldn't it be great to believe him?
UPDATE: For a considerably more detailed discussion of China's currency policy in light of today's news, see economist (and former Clinton-era Treasury official) Brad Setser's comments.