In Defence of China (and Truth and Justice) – by Imad Moosa

(Official White House Photo by David Lienemann)

(Official White House Photo by David Lienemann)

The US – China relationship has shifted in the last decade, yet tensions remain. In July, the Obama administration told the World Trade Organization that China’s antidumping and antisubsidy tariffs, totaling as much as 22 percent, violated free trade rules. Imad Moosa reminds us that there are at least two sides to a relationship and that failure of a relationship is rarely due to one side alone.

American politicians, supported by right-wing economists, do not miss an opportunity to accuse China of harming the US by maintaining an undervalued currency through exchange rate manipulation. And what is the evidence? Well, Big Macs are cheaper in China than the in the US! China’s exchange rate policy is allegedly the reason for the massive US trade deficit and the dwindling manufacturing output and employment.

The list of accusations against China is not confined to its exchange rate policy. The Chinese are accused of excessive accumulation of reserves, too much saving and too little consumption, violation of the IMF and WTO rules, causing global imbalances, hurting the world economy by adopting a policy of export-led growth, causing the global financial crisis, pushing up oil prices, buying the corporate world aggressively, and undermining US security. And there is more.

It is also claimed that Chinese policies are not hurting the US only as the damage inflicted by China extends to all “western” countries and to the “international community” at large. Some pundits claim that China is hindering the recovery of Europe from the debt crisis (by not importing adequately from Europe and by refusing to lend money to distressed European countries). Japan, according to other pundits, is complaining about (the Chinese-caused) weak economic growth, deflation and the challenge posed by China to Japan’s leadership in Asia (I have not heard this from a Japanese politician). Emerging Asian countries are allegedly experiencing uncertainty for not having a clearer picture of how to respond to the challenge posed by China’s low labour costs and the skill-upgrading of its exports. One can only wonder if there is any mishap anywhere that China is not responsible for. The fact on the ground is that the criticism of China is the ultimate form of scapegoating and reflects policy failure elsewhere, particularly in the US, not to mention self-serving bias and the culture of blaming others for self-inflicted damage.

Let us start with exchange rate regime choice and related issues. China is allegedly hurting the world economy because it has chosen to adopt a fixed exchange regime while manipulating the exchange rate and accumulating huge reserves. Exchange rate regime choice is governed by international rules, and there is nothing in the present rules that prohibits a country from adopting a fixed exchange rate against a particular currency. Article IV of the revised IMF rules allows countries to “tie their currencies to any external anchor with the sole exception of gold”—meaning that fixed exchange rates are allowed. China’s choice of its exchange rate regime is a sovereign right guaranteed by international law, but denied by the economists of the Peterson Institute for International Economics.

Accusing China of “currency manipulation” is preposterous and indicative of extreme naivety. Of course China manipulates its currency because intervention in the foreign exchange market to maintain a fixed rate is required under such a system. Prior to 1971 when the world was on fixed exchange rates countries were obliged to “manipulate” their currencies through market intervention. Calling what China is doing “manipulation” is not just outside any legal norm, it would also concern the tens of other countries that peg their currencies to the dollar and other currencies. Therefore, Mitt Romney’s threat to label China a “currency manipulator” on his first day in the White House shows naivety and lack of wisdom. It is unjustifiable economically, now that the Chinese current account is shrinking, while politically it would needlessly inflame the Chinese during a leadership transition.

Those calling on China to float the yuan, or to introduce more flexibility in the exchange rate, want a measure like this to be preceded by a big revaluation of the currency. China has been reluctant to allow massive currency appreciation (or a big one-off revaluation) because it is wary of the fear of overvalued currency. Japan experienced a long period of stagnation after the 1985 Plaza Accord whereby a substantial appreciation of the yen was engineered under pressure from the US. Apart from the economic arguments against forcing China to revalue its currency and change the exchange rate regime, by doing that the US is solidifying its position as a coercive hegemon. In any case, the yuan is not undervalued, now that it has appreciated by some 50% in real terms since the strict peg to the dollar was abandoned in 2005 (coupled with accelerating inflation in China).

As to the accumulation of reserves, this is an accusation that puts China in a classic “damned if you do, damned if you don’t” position. On one hand, it is claimed that China is accumulating reserves aggressively to have some leverage on the US economy, using these reserves as a potential weapon (of mass destruction) against US financial markets. Hence the accumulation of reserves by China is anti-American. On the other hand, if China stops accumulating reserves it will deprive the US from the funds required to finance the external deficit. So not accumulating reserves is anti-American. What is China supposed to do?

China is accused of hurting the US and the world economy at large because the Chinese save too much and consume too little. Instead of tackling the US trade deficit by taking measures to reduce excessive spending and encourage saving in the US, the Chinese are expected to be profligate to eliminate the US deficit. The Chinese government should, for the sake of the “western world”, legislate a law imposing capital punishment on any Chinese citizen who spends less than 80% of their income. Those who think this way choose to forget the fact that China is still a developing economy that needs a lot of growth. They choose not to realise that the high saving rate is rooted in Chinese history and culture. And they choose to overlook the fact that Chinese citizens must save because of the absence of a social safety net, now that China is a capitalist state.

China is blamed for hurting the rest of the world by depending on exports, which is rather strange. Exports represent one side of a transaction that can be completed only if another country is willing to import (it takes two to tango). Blaming the Chinese for the fact that the Americans choose to spend too much and live beyond their means is not exactly fair. If the Americans decide to consume less and save more, that is good for them, but this has nothing to do with China. Yet some pundits advise the Chinese to follow the American example and live beyond their means, borrow and over-indulge in consumption.

It has been suggested that China’s exchange rate policy is as much a violation of the WTO rules as the Chinese violation of intellectual property rights. The underlying reasoning is that an undervalued currency works as an import tax and export subsidy. The problem with this argument is that of translating the magnitude of exchange rate misalignment (which cannot be measured with any degree of accuracy) into equivalent import tariffs and export subsidies that could then be evaluated under the rules of the WTO. In 2009 China was condemned for restricting the exports of certain industrial raw materials, which China defended on the grounds of its desire to conserve the limited supplies and to protect the environment from the pollution resulting from their extraction. China may have been in violation of the WTO rules on that occasion, but so were all of the countries that banned some food exports in 2008 when food prices soared. This, of course, is totally different from accusing China of violating WTO rules because its currency is allegedly undervalued (and it is not).

The accusation that China (not greed, corruption and policy failure) has caused the global financial crisis is too ludicrous to deserve any reply or comment. The same applies to the accusation of pushing up oil prices, now that these are determined mainly in the futures markets in the same way as other financial prices. As for buying the corporate world, it is Chinese capital that has injected life in dead parts of the world, not only in Africa but in Australia and elsewhere.

While Chinese policy makers are robbing growth and employment from the rest of the world by violating the IMF and WTO rules, Chinese athletes are robbing Olympic medals by violating the anti-doping rules of the IOC. The Chinese, it seems, cannot do anything without breaking rules, or so it is claimed. This requires no further comment.

Dr. Imad Moosa is Professor of Finance at the Royal Melbourne Institute of Technology. He is the author of “The US-China Trade Dispute: Facts Figures and Myths” and “The Myth of too Big to Fail”.

See also: ‘The West and the Rest‘ by the same author.

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