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China gets trade edge by exploiting the rules

With China's exports soaring, even as other major economies struggle to recover from the recession, evidence is mounting that Beijing is taking advantage of international trade rules to spur its own economy at the expense of others, including the United States.

Seeking to maintain its export dominance, China is engaged in a two-pronged effort: fighting protectionism among its trade partners and holding down the value of its currency.

China vigorously defends its economic policies, and on Sunday, Premier Wen Jiabao took on critics in the West. He defended China's currency, known as the yuan or the renminbi, against charges that it is undervalued to boost Chinese exports, saying the yuan would be kept "basically stable."

Wen promised that Beijing would import more and urged countries to resist protectionism, saying one country should not seek to disadvantage others during the fragile economic recovery.

He also criticized Washington for souring relations with the recent White House reception for the Dalai Lama, the exiled leader of Chinese-controlled Tibet, and for approving arms sales to Taiwan, which China claims as its own.

In the area of trade, China has maximized its advantage by exploiting a fundamental difference between two major international bodies: the World Trade Organization, which wields strict, enforceable penalties for countries that impede trade, and the International Monetary Fund, which acts as a kind of watchdog for global economic policy but has no power over countries like China that do not borrow money from it.

China had a $198 billion trade surplus with the rest of the world last year, with its exports to the United States outpacing imports by more than 4-1. Despite that, in the last 12 months, Beijing has filed more cases with the WTO's powerful trade tribunals in Geneva than any other country complaining about others' trade practices.

In addition, Beijing has worked to suppress a series of IMF reports since 2007 documenting how the country has substantially undervalued its currency, the New York Times reported Sunday, citing three people with detailed knowledge of China's actions. They insisted on anonymity because of China's sensitivity about its economic policies.

China buys dollars and other foreign currencies — worth several hundred billion dollars a year — by selling more of its own currency, which then depresses its value. That intervention helped Chinese exports to surge 46 percent in February compared with a year earlier.

Many prominent academic economists see a basic contradiction in the global system of oversight on trade and currency.

"Many of us would like to see the WTO-style commitments — with people's feet being held to the fire — at other international agencies, like the IMF," said Jagdish Bhagwati, a Columbia University economist.

Western countries had hoped last year to bring international pressure to bear on China, after years of complaining that Beijing keeps the yuan artificially low.

An undervalued currency keeps a country's exports inexpensive in foreign markets while making imports expensive. That makes a trade surplus more likely, reducing unemployment for that country while increasing unemployment in its trading partners.

In September, President Barack Obama, President Hu Jintao of China and other leaders of the Group of 20 industrialized and developing countries agreed in Pittsburgh that all the G-20 countries would begin sharing their economic plans by November. The goal was to coordinate their exits from stimulus programs and prevent the world from lurching from recession straight into inflation.

The G-20 leaders agreed the IMF would act as intermediary.

But two people familiar with China's response said the Chinese government missed the November deadline and then submitted a vague document containing mostly historical data because it feared giving ammunition to critics of its currency policies at the monetary fund and beyond. The two spoke to the New York Times on condition of anonymity because of the sensitivity of the subject.

China's central bank did not respond to calls and fax messages seeking comment.

If China is found to be manipulating its currency, it could be a political and economic challenge for the Obama administration. Obama called on Thursday for China to introduce "a more market-oriented exchange rate." China's defiant response keeps the administration in a difficult position.

China is the biggest buyer of Treasury bonds at a time when the United States has record budget deficits and needs China to keep buying those bonds to finance U.S. debt. But the Treasury also faces an April 15 deadline for whether to list China as a country that manipulates the value of its currency.

If China is listed, that could embolden members of Congress to seek restrictions on Chinese exports to the United States.

Information from the Associated Press was used in this report.

China gets trade edge by exploiting the rules 03/15/10 [Last modified: Monday, March 15, 2010 7:05am]
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