Lots of Economic Dialogue With China, Little Strategy

Lots of Economic Dialogue With China, Little Strategy

By Scott Paul - July 6, 2014

U.S. Secretary of State John Kerry and U.S. Treasury Secretary Jack Lew are leading a high-level delegation to Beijing this week for the sixth Strategic and Economic Dialogue (S&ED) with China. No doubt there will be a lot of discussion with Chinese officials over cyber-hacking, investment, territorial disputes, and even exchange rates. But for those of us who prefer results, this meeting will likely be an exercise in frustration.  

Even Lew has acknowledged the limitations of the dialogue, saying last week of China’s undervalued currency: 

“We seem to take two steps forward and at least part of a step back. We need to keep making progress getting toward a market-determined exchange rate.” 

I agree. But there’s plenty the Treasury secretary could do about it right now, starting with the designation of China as a currency manipulator. Market access to the United States is an enticing incentive to modify market-distorting behavior such as currency manipulation. Dialogue, as we have seen, is not. 

Since this dialogue got underway, our annual goods trade deficit with China has grown to a record $318 billion. More recently, China has slowed the pace of yuan appreciation. For a currency pegged to political pressure, that’s a telling sign. Any trade or investment barrier that China promises to eliminate is simply replaced by another one. For U.S. negotiators, it’s like playing an unwinnable game of Whack-A-Mole.  

If China were a player in the World Cup, it would have been red-carded many times over by now. But still we talk. And we get nowhere.

The Treasury Department in the Obama years has passed on 11 straight opportunities to call out the Chinese government for keeping a finger on the currency exchange rate. Actually calling them out their currency peg, however, would mark the first step toward making currency manipulation the actionable trade offense that it is.   

China’s intentionally undervalued exchange rate is essentially a large, dependable subsidy for its exports, and one that’s funded by a tax on our own manufacturing exports. And despite the Obama administration’s acquiescence to Beijing’s drawn-out currency correction, it’s not a tenable one. It’s long past time that our response to this slow-walking actually showed some teeth.   

Negotiations with the threat of a bite actually work. It succeeded in 2005, when a Senate procedural vote on a currency bill goaded the yuan to rise. 

Beijing budged the yuan again after Jack Lew’s predecessor, Timothy Geithner, talked tough on currency manipulation ahead of a G-20 meeting in 2010. And the yuan rose after House and Senate votes on currency legislation in 2010 and 2011. And guess what happened after President Obama, challenged on the issue by Mitt Romney, promised to combat China’s mercantilist trade practices? 

Those who decry sanctions against China for its currency manipulation and other trade violations need to take a hard look at America’s changing landscape. More than 55,000 factories have closed since 2000. U.S. weapons systems are dependent on parts from China. New American bridges are built with Chinese steel. There’s nothing strategic about those circumstances. 

A successful conclusion of this sixth Strategic and Economic Dialogue would mean a U.S. delegation imparting on Beijing a sense of urgency to correct its exchange rate and trade cheating. Secretaries Kerry and Lew would lay out objective criteria for progress on these matters while also putting the credible threat of sanctions on the table. Engagement and dialogue will only work if accountability exists. Time to get out that red card. 

Scott Paul is president of the Alliance for American Manufacturing.

Scott Paul

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