China's hard line on economics

On March 15, a bi-partisan group of 130 House members sent a letter to Treasury Secretary Tim Geithner and Commerce Secretary Gary Locke urging them to immediately address the growing problems associated with China's fixed exchange rate. According to Rep. Mike Michaud (D-ME) who organized the letter,

China's currency manipulation essentially subsidizes Chinese exports and imposes tariffs on foreign imports. This presents an insurmountable trade barrier to U.S. manufacturers," If the administration fails to act on this issue, it will hold back our economic recovery and hurt the ability of American small businesses and manufacturers to increase their production, keep their doors open, and create jobs.
Beijing sets its exchange rate by government fiat, undervaluing its value by as much as 40 percent to gain a price advantage in home and overseas markets. Even as global commerce declined in the wake of the financial crisis, China's exports remained strong. The U.S. trade deficit in goods with China was $226.8 billion last year and Americans have sent a net $1.7 trillion to China since 1999.

Beijing has taken a hard line in response to the Congressional letter, hoping to deter the Obama administration from taking action. Bi Jiyao, senior researcher at the National Development and Reform Commission, China's central planning authority, warned the U.S. government to think twice before branding China a "currency manipulator" in a Treasury report due out in April. He told the state-owned China Daily, "Doing that, as they can see clearly, is tantamount to starting an all-round trade war." The same news story quoted Xia Bin, director of the Financial Research Institute of the State Council's Development Research Center,
The yuan's value is not the cause of the U.S. deficit, which is actually caused by its defective economic structure...It has few products to export and among the few it can sell overseas, it has blocked exports of high-tech products to China.
Beijing has long demanded that Washington drop security restrictions on the transfer of "dual use" technology that could be of value to the Chinese military.

According to a report in The Financial Times, Beijing is also urging American business groups with ties to China to lobby for its cause in Washington. The story quotes Yao Jian, a spokesman at the Chinese commerce ministry, as saying some companies had already been lobbying against restrictions on exports to America. "We hope that U.S. companies in China will express their demands and point of views in the U.S., in order to promote the development of global trade and jointly oppose trade protectionism," he said. Firms that have moved factories to China (often in joint ventures with Chinese partners) or who have outsourced orders to China enjoy the benefits of Beijing's protectionism by moving behind its mercantilist walls. The interests of such firms are at odds with economic growth in the American economy.

The Wall Street Journal
, however, reports American business is having doubts about its future in China,
China's relationship with American companies is starting to sour, as tougher government policies and intensifying domestic competition combine to make one of the world's most important markets less friendly to multinationals.

Interviews with executives, lawyers, and consultants with long experience in China point to developments they say are making it much harder for many foreign companies to succeed. They say the changes suggest Beijing is reassessing China's long-standing emphasis on opening its economy to foreign business-epitomized by the changes it made to join the World Trade Organization in 2001-and tilting toward promoting dominant state companies.
At the end of the annual National People's Congress session Sunday, Premier Wen Jaibao stated, "A country's exchange rate policy and its exchange rates should depend on its national economy and economic situation." But every country, not just China, has a right to make decisions based on its "national economy and economic situation." Counteracting Beijing's fiat exchange rate policy is legitimate and necessary if America is to achieve rapid economic recovery. President Obama needs to protect U.S. interests with the same determination shown by Chinese leaders.