In a column at Voxeu.org, Director of the Centre for European Policy Studies Daniel Gros offers a solution to global current account imbalances, specifically between China and the U.S. to avoid risking a trade war. Gros proposes a “reciprocity” requirement — if the U.S. cannot buy Chinese government bonds, then China cannot buy U.S. bonds either.
On Sept. 29, 2010, the U.S. House of Representatives passed the Currency Reform for Fair Trade Act (H.R. 2378) by a 348-79 vote, sending the legislation to the Senate. The legislation would allow the U.S. to seek trade sanctions against China and other nations for manipulating their currency to gain trade advantages.
American manufacturers contend that China’s currency is undervalued by as much as 40 percent against the dollar. That makes Chinese products cheaper and more competitive in the United States and American products more expensive in China.
The legislation would allow the imposition of stiff sanctions on Chinese imports. It would expand the definition of improper government subsidies to include a government’s manipulation of its currency to gain trade advantages. Currently, the Commerce Department does not consider currency manipulation as a government subsidy for which it can impose trade sanctions. For more information, see this NPR story.
China is able to manipulate its currency with impunity because the Central Bank of the People’s Republic of China may continue “steering” its exchange rate by accumulating more and more international reserves – as it did recently by investing heavily in Japanese government bonds, forcing Japan to intervene in the market for dollars to keep its currency from spiking higher, threatening its economy. The US, Japan, or the ECB cannot do the same because China has capital controls and there are simply no significant renminbi (the nickname for China’s currency, the yuan) assets that foreigners are allowed to invest in.
However, the sanctions considered by the U.S. Congress would be illegal under World Trade Organization rules and would threaten to throw the global trading system into turmoil. So, Gros proposes that “The US and Japan only need to invoke the principle of reciprocity and declare that they will limit sales of their public debt henceforth to only include official institutions from countries in which they themselves are allowed to buy and hold public debt. Instead of the ‘moral suasion’, tried in vain by the Japanese, the Chinese authorities would just be told that they can buy more US T-bills Japanese bonds only if they allow foreigners to buy domestic Chinese debt.”
Gros’ proposal is sensible, but one must wonder, with the U.S. so reliant on China to finance its debt, would the theory work in practice?
Please click the following link to read Gros’ full column at Voxeu.org: A reciprocity requirement: The easy and legal way to stop currency manipulation.
Gregg D. Killoren
victoria1014
