Commentary Magazine


New Trade Sheriff in Town

Yesterday Timothy Geithner, in written responses to the Senate Finance Committee, stated that China was “manipulating” its currency.  The Treasury secretary nominee emphasized that “President Obama has pledged as President to use aggressively all diplomatic avenues open to him to seek change in China’s currency practices.”  The Bush Treasury had consistently refused to designate China a currency manipulator in its twice-yearly reports to Congress pursuant to the Trade Act of 1988.  The next such report is due in April.

The Trade Act doesn’t mandate anything more than negotiations once a country has been branded a currency manipulator.  Yet as Geithner also noted, Obama, while a senator, called for “tough legislation to overhaul the U.S. process for determining currency manipulation and authorizing new enforcement measures so countries like China cannot continue to get a free pass for undermining fair trade principles.”

The Bush administration approached China gingerly on trade and had relatively little to show for its polite and deferential approach.  The Chinese have lots of experience intimidating foreigners, and they were certainly successful with past administrations, which seemed to lose their swagger when approaching the Grand Celestial Court in Beijing.

These days, Beijing is not so fearsome.  Its economy, for one thing, is decelerating at an alarming rate.  Yesterday, the National Bureau of Statistics announced that China’s growth in the fourth quarter of last year was 6.8 percent.  Yet in reality it was closer to zero, and in December the economy probably shrank.  The slide is dramatic, considering that growth in 2007 was, according to newly revised official numbers, 13.0 percent — and it may have been higher than that due to poor sampling procedures that did not capture the results from small producers.

Not surprisingly, senior Chinese leaders are in a panic about the drop-off in economic performance.  Should the Obama Treasury label China a currency manipulator in April, they will undoubtedly huff and puff, but we should refuse to cower.  At this moment Beijing’s leaders know they need us more than we need them.  The stability of their regime depends on prosperity, and prosperity depends on access to the American market.  The United States, on the other hand, has the resources to fund its own debt, especially since American savings rates are increasing as consumption falls.

Will Obama trigger a trade war with China?  No one wants one, of course.  But no one in Washington should shrink from defending the American economy.  Beijing, after all, has never shed its mercantilist thinking, and now it is trying to protect its domestic market with currency and other barriers.  We need to speak plainly about this, and Geithner’s statement is a good start toward a sensible trade policy.