Punishing China May Be Difficult

Can US presidential contender Mitt Romney fulfill his pledge to slap punitive tariffs on 'currency manipulator' China?
An analysis by Parameswaran Ponnudurai
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President Bill Clinton threatened to strip China of America's special trade advantages. President Barack Obama vowed to close down the Guantanamo Bay detention facility. Now, White House aspirant Mitt Romney promises to take action against China for manipulating its currency.

Clinton and Obama both backed away from their election campaign promises and, if expert predictions are accurate, Romney may also abandon his pledge.

Romney, the Republican challenging incumbent Democrat Obama, has pledged to label China a currency manipulator on "day one" of his administration should he be elected into office, saying Beijing's practice of keeping its yuan currency down against the U.S. dollar made its exports more competitive and robbed Americans of jobs.

Experts view Romney's promised action—a break from a bipartisan policy that has been in place for nearly two decades—as a symbolic move. It will have little impact in the absence of Congress passing legislation to impose sanctions on China and even then, the plan could backfire, they say.

"It actually accomplishes very, very little," said Nicholas Lardy, an expert on the Chinese economy at the Washington-based Peterson Institute for International Economics.

By labeling China a currency manipulator, Romney wants to use U.S. law to launch a process of slapping punitive tariffs on Chinese goods to protect American manufacturers.

But Lardy said the only statutory requirement when China is termed a currency manipulator is for the U.S. Treasury to enter into discussions with Beijing about the yuan value, a process that has already taken shape over the last seven to eight years.

A president can however influence the U.S. Congress, which has control over tariffs, to launch sanctions on China—the biggest holder of U.S. debt—but this could set off a trade war between the world's two biggest economies.

It would have negative consequences not only for the U.S. but for the global economy, which is still nursing the wounds of a severe economic downturn in 2008/2009, Lardy said.

Bills gathering dust

Congress has previously passed several bills to impose tariffs on China as punishment for artificially keeping its currency low but they have been gathering dust in the legislature.

"So, I think the practical consequences of naming [China] a manipulator would be very small. It is a great soundbite. It makes it sound like you are really going to lower the boom but there is really not much teeth behind it," Lardy said of Romney's planned move.

Obama has emphasized in the presidential debates that the United States has to tread carefully in taking any action against China on the currency issue, arguing that U.S. exports to China have doubled during his administration and that the yuan is “at its most advantageous point” for U.S. exporters in nearly two decades.

He attributed the rise of the yuan to diplomatic prodding by the U.S., saying, "We're going to keep on pressing" China.

Obama himself was under pressure during his early days in office over China's practice of shielding its currency for trade advantages.

Once, he even called China a currency manipulator at a press conference, but he has avoided using the term during the U.S. Treasury Department's mandatory evaluations of international currencies.  

Romney says the time has come for the United States to put its money where its mouth is.

“On day one, I will label [China] a currency manipulator, which allows us to apply tariffs [in sectors] where they’re taking jobs,” Romney said at the final debate with Obama on Monday.

“They’re stealing our intellectual property, our patents, our designs, our technology, hacking into our computers, counterfeiting our goods,” he said.


Experts says Chinese officials appear surprised by the promised action by Romney, a former governor of Massachusetts and an accomplished businessman.

"I talked to a bunch of Chinese people at various levels and they have always thought going into this campaign that they were going to like Romney," including their perception that "Republicans were the party of business and trade," said CNN commentator Fareed Zakaria after the debate Monday.

"It has been a rude surprise to them that Romney has been so tough. So, I imagine in Beijing, very reluctantly, they are coming to the conclusion that whatever America may want, they want continuity,  not change," he said.

Some say Romney's plan does not make much sense today. The yuan has shot up to a nearly two-decade high against the U.S. dollar. The Chinese currency closed at 6.2480 against the greenback on the spot market on Tuesday.

The yuan has in fact been appreciating gradually since 2005 when Beijing de-pegged it from the dollar. It has cumulatively appreciated about 30 percent against a basket of currencies of China's key trading partners.

In addition, China has not been intervening aggressively in the market the past year to depress the yuan by buying dollars—if the level of Beijing's foreign exchange reserves is any indication.

No change

Over the last year and a half, there has been almost no change in the Chinese foreign exchange reserves, which stood at U.S. $3.29 trillion at the end of September.

"China's central bank has not been intervening in the market on the scale that they were a few years ago. Indeed, they are intervening very, very little," Lardy said.

"I think we are at a point now where you could begin to make the argument that market forces are playing a much, much greater role in determination of the value of the Chinese currency than was the case in the not too distant past."

Romney may also face pressure from the strong Republican business lobby to shelve his plan if he wins the presidential race.

"The business community would likely voice strong opposition to sanctions, because they would threaten its substantial interests in China. Japan, Korea, Taiwan, and other countries whose companies use China as the manufacturing and assembly platform for products that they ship to America with labels 'Made in China' would lobby hard against retaliatory tariffs," said Richard Bush, an Asia expert at the Washington-based Brookings Institution.

"So the policy and political logic would likely lead a President Romney to accept the advice of his more moderate foreign policy and economic advisers and abandon his campaign pledge," Bush said.

"He will lose some credibility by doing so, but it won’t be the first time that a candidate has walked away from a campaign pledge. And he will have laid down a marker with the Chinese that may make it easier to address other important issues in the economic relationship."

Trade status

In 1993, President Clinton threatened to take away China’s most-favored-nation (MFN) trade status if it did not improve human rights but reversed course and renewed its trade privileges despite acknowledging that there was little movement on the rights front.

American businesses had pressed Clinton and his economic advisers to keep China's trade privileges.

Similarly, in the 2008 election campaign, Obama made a pledge that he finds hard to keep—to close the Guantanamo Bay detention facility within one year of taking office.

“I still want to close Guantanamo,” he said last week in an interview on the Comedy Central cable network. “One of the things we have to do is put a legal architecture in place, and we need Congressional help to do that so that not only am I reined in but any president’s reined in in terms of some of the decisions we’re making.”


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