By Doug Palmer - Analysis
WASHINGTON (Reuters) - As a senator and candidate for president, Barack Obama urged the United States to take a tough stand against China over its foreign exchange system.
But over a year since taking office, Obama’s administration is still weighing whether to launch formal action over China’s currency in what could be the biggest -- and riskiest -- challenge by Washington to Beijing’s economic policies.
Although there is agreement among Western economists the Chinese yuan is substantially undervalued, labeling China a currency manipulator could backfire on the United States, making it unlikely Obama will take that step soon.
“The Chinese might react quite badly to that. Maybe eventually, the U.S. may have to do it. But the question is whether it can do some things in the meantime to ensure it has more friends on its side,” said Arvind Subramanian, a senior fellow at the Peterson Institute for International Economics.
Obama brought concerns about China’s exchange rate back to the top of the U.S. economic agenda last week when he said countries that undervalue their currency put the United States at a huge competitive disadvantage.
The Peterson Institute, a Washington-based think-tank, estimates the yuan is undervalued by as much as 25 percent to 40 percent, effectively subsidizing China’s exports and taxing its imports at the expense of other countries.
China says its currency policy is an internal matter, driven mainly by the need to maintain rapid economic growth and provide jobs. It has held its currency, the renminbi, at about 6.83 to the dollar since July 2008.
Obama’s comments have focused attention on whether he will formally label China as a currency manipulator in a semi-annual Treasury Department report due on April 15, a move that would likely inflame bilateral relations with China.
U.S.-China ties already have been put to the test recently over Washington’s plan to sell some $6.4 billion of arms to Taiwan, Google’s (GOOG.O) threat to quit China over censorship and hacking concerns and an expanding list of trade disputes.
Meanwhile, the United States needs China’s cooperation to rein in Iran’s nuclear program, “a high-voltage foreign policy and security issue,” said Ed Gresser, trade policy director at the Democratic Leadership Council.
China is also the United States’ biggest creditor and senior Chinese military officers, in an interview published on Monday, urged the country sell some U.S. bonds to punish Washington for the planned arms sales to Taiwan.
Rather than act on his own, many believe Obama should enlist support from key emerging economies like Brazil, India, Mexico and Turkey, which compete with China for exports and also suffer from its currency regime.
“I think there is concern about China’s currency practice around the world. Why not tap into that?” Subramanian said.
The United States cannot succeed if it acts unilaterally, he added, because China will not tolerate being seen as giving into pressure from its main rival for superpower status.
China, as a member of the Group of 20 leading industrialized and developing nations, has pledged to help address imbalances that have long plagued the global economy.
“The U.S. should certainly continue its engagement with China ... But unilateral coercive measures would seem at odds with that agreed G20 plan and could well prove counterproductive,” said Daniel Price, a lawyer at Sidley Austin who worked on trade in the White House under former President George W. Bush.
Washington’s angst over the value of yuan goes back to at least 2002, when the U.S. trade deficit with China first topped $100 billion. Data released on Wednesday showed the trade gap with China narrowed 15 percent in 2009 to $226.8 billion, but was still the largest U.S. trade deficit with any country.
Democrats hammered Bush for years on his handling of U.S. policy toward China’s currency.
Those critics include Obama who signed a petition in 2005 asking Bush to seek permission from the World Trade Organization to file sanctions against China if it did not revalue the yuan by up to 40 percent.
Bush refused, saying the United States would have better luck persuading China to reform through diplomacy. In mid-2005, China did make some changes that allowed its currency to strengthen about 19 percent over the next several years.
But a WTO case was still on the minds of some Democratic and Republican senators in March 2009 when they weighed Ron Kirk’s nomination to be U.S. Trade Representative.
Kirk resisted taking a firm stand, but promised the administration would “review China’s actions for consistency with its WTO obligations,” and would pursue a case if that was the most effective means to address U.S. concerns.
Then Rep. Nancy Pelosi, now the Speaker of the U.S. House of Representatives, and other senior Democrats also signed the AFL-CIO labor federation’s currency petition back in 2005.
U.S. trade officials said this week they are still reviewing the possibility of filing a case.
But Gresser of the Democratic Leadership Council, a pro-trade Democratic group, said he doubted that would happen.
“The WTO doesn’t have a formal agreement about currency. I think it would be a very difficult case to make. And if you lose, you would have kind of a validation of the Chinese currency system,” he said.
The best option is for the United States to work with other countries to put pressure on Beijing, he added.
However, if Obama does not label China a currency manipulator, AFL-CIO officials say he could face the same petition he signed back in 2005.