“The hype about a trade war is unjustified — and, anyway, there are worse things than trade conflict. In a time of mass unemployment [in the US], made worse by China’s predatory currency policy, the possibility of a few new tariffs should be way down on the list of worries,” he wrote.
China’s response is contradictory. At one level it said its currency value has nothing to do with its trade surplus. At the same time, Chinese Premier Wen Jiabao (溫家寶) reportedly said: “We cannot imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs.”
In other words, China’s undervalued currency is a hidden export subsidy for its exports.
At the official level, the US is trying to play down the danger of a looming trade war while keeping up the pressure on China for a significant appreciation of its currency.
“We’re not going to have a trade war. We’re not going to have currency wars,” US Treasury Secretary Timothy Geithner has said.
Geithner might not think so, but even the IMF is worried about it, as different countries seeking export advantages might become engaged in a bout of competitive currency devaluations.
He believes, though, that it is in China’s “own interest to allow its currency to appreciate in response to market forces.”
Will China do it significantly? It does not appear likely. So political, strategic and economic factors are converging to make for uncomfortable times ahead.
Europe is also worried about China’s undervalued currency. Beijing, though, is working to lure Europe away from a united front with the US. Both the US and Europe have trade deficits with China.
Wen was recently in Europe on a charm offensive. He maintained China’s position on its currency value, arguing that his country needed rapid growth to pull millions of its people out of poverty.
However, he promised China would help maintain the euro’s value by buying European bonds to help the eurozone countries refinance their struggling economies.
Speaking in Greece, during a one-week tour of Europe, he said: “I have made it clear that China supports a stable euro ... We will not reduce our holdings of European bonds in our foreign exchange portfolio.”
The choice of Athens as the starting point of his recent European tour and his remarks about supporting the euro are significant as China recently entered into a wide-ranging set of agreements for economic cooperation with Greece.
In addition to Greece, which is in considerable trouble because of its debt, the message is also meant for other similarly placed European economies like Portugal, Spain and Ireland to create closer economic links with China.
As some of the weaker economies in the eurozone are struggling to keep afloat, China’s assurances about buying euro bonds will be a welcome relief.
At the same time, it might distract them somewhat from the issue of China’s undervalued currency, where the US is much more concerned because of its huge recurring trade deficit with China. The seemingly united front between the US and Europe might, therefore, be susceptible to Chinese machinations.
At the same time, China’s increased investments in European bonds will give it even greater leverage over Europe, as it becomes beholden to China’s credit and a web of new and expanded economic linkages.
Even Europe’s largest economy, Germany, is increasingly becoming dependent on China for its exports.