From US President George W. Bush through Congress and the Senate, there have been repeated calls for the Chinese to devalue the yuan in order to ease the current imbalance in Sino-US trade. It seems that China's undervalued currency is the sole culprit responsible for the US' gargantuan trade deficit.
The US trade deficit with China hit a record high of US$162 billion last year, a figure that constituted one-fourth of the US' total deficit for that year. It is expected to widen to US$200 billion this year.
However, export figures from China's customs authorities amount to only one-half of those of their US counterparts, which is a result of differences in how the two countries' customs authorities perceive Hong Kong. At the same time, the US$162 billion figure only includes goods, but not services and trade. The US actually has a trade surplus with China when it comes to intellectual property and other services.
Furthermore, the four Asian tigers have significantly reduced their historically huge trade surpluses with the US by switching the export of their goods to China. This has led to Hong Kong actually having a trade deficit with the US.
In other words, the US$162 billion figure represents the Greater China economic region's overall surplus with the US to a certain extent. As a result, the actual Sino-US trade gap has been exaggerated. Even if these figures were correct, balancing the US-China trade deficit would only take care of a quarter of the total, leaving it with a large chunk of the overall deficit untouched.
An even more important question is whether an appreciation of the yuan against the US dollar would really eliminate the US' trade deficit with China.
In the 1980s, prior to the rise of China, Japan was the main source of the US' trade deficit, totaling somewhere around US$40 billion. Back then, Japan brought the US to its knees in the automobile, semiconductor and home appliance sectors and the slogan "Japan First" could be heard everywhere.
On Sept. 22, 1985 the US and the European Community forced Japan to sign the Plaza Accord, which held that the Japanese yen was undervalued and that this was the main cause of the US' trade deficit. Japan therefore had to remove its dollar peg and let the yen appreciate against the US dollar. The language used in the accord was frighteningly similar to that now being used to force China into taking action over the yuan.
The difference is that back then, Japan was militarily and diplomatically dependent on the US, and did not have the power to say "No." After signing the Plaza Accord, the yen appreciated from ?250 to the US dollar to its current level of around ?100 to the dollar.
So how much did the US' trade deficit with Japan fall as a result of this 150 percent appreciation? The answer is that it has slowly increased to US$75 billion. Compared to 1985, the appreciation of the yen has increased the deficit by an additional 50 percent, even though the Japanese economy has been stagnant for over a decade. Still, we don't hear any one chanting the slogan "Japan First" today.
For the US, although its deficit problem remained unresolved, it at least accomplished its goal of eliminating the threat of Japanese economic hegemony.
Given this example, it is not surprising that China is not willing to listen to the US. The US' purpose in pushing for an appreciation of the yuan has nothing to do with resolving its trade deficit with China, since a devaluation will not resolve the issue. What the US probably wants to resolve is the threat posed by China's rising international status.
There are three main reasons why China will continue to resist US pressure for another two to three years and only then accept a token appreciation.
First, China currently has more than 60 million workers in its state-owned enterprises (SOE) and more than 300 million farmers and agricultural workers. By comparison, the 100 million-strong US work force only includes about 1 million farmers. The redundant personnel in China's SOEs and the excessive number of farmers that have to be given new employment number in the hundreds of millions, and this would be a hard task for any government.
China needs rapid economic growth and expanding export markets to create employment opportunities. If the Chinese yuan is allowed to appreciate too much, it could cause economic and export growth to slow. The enormous numbers of unemployed that would result would plant the seeds of social unrest and could possibly destabilize the government.
Second, the Chinese high-tech industry is still lagging behind multinational companies in terms of quality, but its prices are very competitive. Devaluing the yuan would harm the price advantage that China's high-tech industry currently enjoys, and this would probably kill off any hopes China has of competing internationally.
Third, if the Chinese yuan were allowed to float freely, China's weak financial system would become a target for international vultures. Besides, China is speeding up its financial reforms and the four biggest state-owned banks have already been listed on stock markets outside of China, which has attracted investments from international banks. They have also opened up management and board positions in order to become stronger and to help adapt to international demands.
Compare this to Taiwan's financial reform where domestic companies simply merge with one another and are unable to gain any international influence.
It is understandable that China will not allow its currency to fluctuate too much before carrying out its financial reforms so it can avoid attracting the speculators. Maybe China will allow the yuan to float by 2008 if it is able to complete its financial reforms in time.
China needs time, but that is something the US is not prepared to give. If the US really wants to resolve its trade deficit with China, two good approaches would be to abolish the Wassenaar Arrangement and remove restrictions on high tech exports to China, but that would speed up China's technology development.
It is obvious that this is a win-win solution to the problem. So it is difficult to understand why the US persists in pushing for the revaluation of the yuan when that will harm China while bringing no benefit whatsoever to the US itself.
Lo Chu-ping is an assistant professor of economics at National Cheng-Kung University.
Translated by Lin Ya-ti
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