"Far too little progress ... Far too slow and hesitant ... strong disappointment..."
Did the U.S. blink? In the government's much-anticipated Report to Congress on International Economic and Exchange Rate Policies, released late Wednesday afternoon, the Treasury Department pursed its lips, scolded and shook its head sadly with great dismay. But it could not, would not, screw up the courage to label China a currency "manipulator."
Many economists and representatives of the U.S. manufacturing sector believe that China is unfairly keeping the value of the yuan low to make Chinese exports more attractive. "In the final analysis, however, the Treasury Department is unable to determine, from the evidence at hand, that China's foreign exchange system was operated during the last half of 2005 for the purpose (i.e., with the intent) of preventing adjustments in China's balance of payments or gaining China an unfair competitive advantage in international trade."
Let's put aside for the moment the question of whether China really is a manipulator. This is not a case where Treasury Secretary John Snow actually weighed the evidence and made what he thinks was the correct decision, purely on economic grounds. This is a case where the Bush administration decided that the drawbacks to labeling China a currency manipulator, such as pissing off its No. 1 trade partner and U.N. Security Council member, outweighed the domestic political benefits. (The report hadn't been released for 15 minutes before Kevin Kearns, the president of the U.S. Business and Industry Council, was lambasting it: "By failing to take forceful action on Chinese currency manipulation, the Bush administration in effect is opting for the economic development of China over that of the United States. If President Bush, Secretary Snow, and individual members of the U.S. Congress want to favor Chinese interests over American, they should seek office in Beijing.")
So in that sense the U.S. did lose this game of chicken. Protectionist sentiment in Congress is likely to increase, and the wishy-washy language of the report is certain to do nothing for the president's continually plummeting poll numbers.
But, loath as we are here to give the current administration the benefit of the doubt, ever, it is worth noting that China did start the process of allowing the yuan to rise last summer. It hasn't risen very fast, but China's leaders have been saying all the right things about their future plans for the economy, and have been proceeding, slowly but surely, to introduce one structural reform after another. If one is to take them at face value, which Snow desperately wants us to do, then a little patience might be in order. Not to mention that two different Nobel Prize-winning economists, Joseph Stiglitz and Robert Mundell, have both advised China not to give in to U.S. pressure, on the grounds that a strong yuan could cause serious economic problems, not just for China, but for all of Asia.
In the absence of absolute certainty on what the correct strategy for China should be, How the World Works is going to have some fun imagining the shoe on the other foot. The Treasury report takes quite the schoolmarm tone in explaining to China exactly what it should and should not be doing. What, one wonders, would a similar Chinese analysis of the U.S. economy look like? Might it express dismay at the ballooning federal deficit fueled by Bush's brilliant strategy of simultaneously cutting taxes and boosting spending? Might it wonder whether it makes any economic or political sense to commit oneself to global trade policies that put huge pressures on American workers, without providing a safety net anywhere near robust enough to compensate those who lose out from such policies? Might it question whether saber-rattling at Iran is a smart geopolitical move, given the already extremely jittery oil markets?
Or might it, in a most un-Chinese way, simply be blunt? Get your own house in order, Mr. Bush, before you tell us what to do.