Administration Steps Up Saber Rattling with China

Let’s see….early in the days of this Administration, Treasury Secretary Geithner said some pretty critical things about China. The Chinese threw a big temper tantrum and Geithner backed down. He had tended to try to play down tensions with China over its mercantilist policies (the most important being pegging its currency at an artificially low rate) until last April, when it seemed as if the Treasury might do the heretofore unthinkable and certify China a currency manipulator. But then, China blindsided the US by announcing that it was going to move towards a more market oriented currency policy, with no timetable announced. Pretty much everyone took this to be a big deal; we called it to be a headfake, which it has proven to be. The reminbi has barely budged versus the dollar, which means it has actually fallen on a trade-weighted basis, the opposite of what you’d see if it was actually liberalizing its currency policies.

Geithner is actually sounding serious, but in this game of chicken, he really, really wants China to blink. However, the Chinese do not seem to be reverting to their usual displays of pique, and they were so obliging as to bump up the value of the renminbi a tad.

It isn’t clear at all how far Team Obama is willing to go in pushing China. They’ve been remarkably passive in dealing with high unemployment; Reagan was far more active. The midterm elections give them more cover with the Chinese (they can say, plausibly, that domestic politics demand some concrete steps from China). But the spate of Tea Party primary wins is one of the few things that might galvanize otherwise disillusioned Democrats into turning out in November. And if the Administration believes this to be the case, they may settle for some face gestures from China in lieu of real action.

From Bloomberg:

“The pace of appreciation has been too slow and the extent of appreciation too limited,” Geithner said in testimony prepared for a congressional hearing today. “We are examining the important question of what mix of tools, those available to the United States and multilateral approaches, might help encourage the Chinese authorities to move more quickly.”

Geithner’s comments, his strongest since he took office in January 2009, highlight growing frustration among American officials with policies they say put American companies at a competitive disadvantage. The U.S. yesterday filed a pair of complaints against its second-largest trading partner with the World Trade Organization, and lawmakers facing elections in November are introducing measures allowing companies to pursue sanctions against China for its currency stance….

Geithner said China’s currency stance has created a “major distortion” in the global economy that is having a “negative impact” on the U.S. He said appreciation of the yuan would help with economic rebalancing, while not erasing the U.S. trade deficit with China.

He called on China to adjust its exchange rate and make a slate of other structural reforms to policies on interest rates, energy prices and service-sector investment. Geithner pledged the U.S. would “aggressively” pursue trade remedies, such as yesterday’s WTO complaints on electronic payment services and steel exports.

Note that branding China a currency manipulator would then allow the US to impose sanctions, which is certain to lead to a response from China (they’ve taken a tit for tat strategy in response to past salvos). But China is pointedly refusing to back down on other disputes. From the Financial Times:

Anshan Iron and Steel is pressing ahead with a controversial US investment in the face of strong opposition in Congress and by industry associations.

The Chinese state-owned group will buy a 14 per cent stake in privately-owned Steel Development and join the board of directors, the companies announced on Wednesday, without disclosing how much Anshan would pay for the stake.

The other equity partners in Steel Development have not been disclosed, but John Correnti, its chief executive, said they were “all American” and included himself.

Steel Development is building a $168m reinforcing bar mill in Amory, Mississippi and plans to build four more mills after that. The investment has been heavily criticized by members of the Congressional Steel Caucus, who issued a letter in July urging the government to investigate the deal on national security grounds.

The investment is relatively small but it is nonetheless symbolic when Beijing has been increasingly vocal with complaints about the antagonism towards Chinese companies in the US.

That congressional letter warned that the deal would “allow a Chinese company to exploit the American steel market” and access new steel technologies.

While the US wants a concession from China. this dispute could veer off in unexpected directions if neihter side backs down.

Originally published at naked capitalism and reproduced here with the author’s permission.