Transcript China and the Trade Challenges for the Next Four Years

China’s Currency
Manipulation and
Legislative
Initiatives
Robert B. Cassidy
Director
International Trade and
Services
The Important Questions
• Does China manipulate its currency?
• Is the Yuan undervalued?
• Does it’s undervalued currency hurt the
United States?
• Does China’s manipulation help China?
• What do the various legislative initiatives
do to correct the problem?
#1: Does China Manipulate the
Exchange Rate for the Yuan
• 1994: China unified its dual exchange
rate and depreciated it by 50%
• China has fixed its exchange rate at 8.28
yuan/dollar since 1995
• Exporters exchange dollars for yuan from
the SAFE and at no other exchange rate.
#1: Does China Manipulate the
Exchange Rate for the Yuan
• Fixed exchange rate does not violate
WTO or IMF rules
• Violates WTO rules when exchange rate
frustrates the intent of the WTO
agreements.
• Violates IMF rules when a country
manipulates its exchange rate to gain an
unfair competitive advantage.
#2 Is the Yuan undervalued?
Source
Publication
Date
Percent Undervalued
World Bank
PPP Level
2000
75%
Big Mac Index
The Economist
Apr. 2003
56%
Preeg
MAPI
Sept. 2002
40%
Yang and BajeuxBesnainou
Is the Chinese Currency
Undervalued?
Nov. 2003
27.99% based on PPP
(using 1985 as fixed base
year)
Williamson
IIE lecture
Oct. 2003
Over 25%
Anderson/UBS
The Complete RMB
Handbook
Oct. 2003
Nearly 25% in real terms
Goldstein
Testimony to Congress
Oct. 2003
15-25%
O’Neill & Wilson
Goldman Sachs Rpt.
Sept. 2003
10-15%
Bhalla
Chinese Mercantilism:
Currency Wars and How
the East Was Lost
July 1998
10-15% as of 1998
Chinese Trade Data Incorrect
China’s Global Trade Surplus (Exports-Imports),
Adjusted for Hong Kong Re-Export Trade, 1999 – 2004 YTD
By Source, in billions of US$
Year
1999
2000
2001
2002
2003
2003 (Jan-June)
2004 (Jan-June)
China Data
$28.0
$30.7
$26.2
$31.8
$29.9
$8.3
$2.5
Partner Data
$118.8
$147.9
$151.5
$174.6
$202.0
$49.9
$63.2
Prepared by Georgetown Economic Services
Percent Divergence
325%
382%
479%
450%
575%
504%
2411%
Chinese Trade Data Incorrect
Comparison of China-Reported Data with Trading Partner Data
2003 Bilateral Trade Surplus(+)/Deficit(-)
Million U.S. Dollars
Country
Canada
Japan
European Union (15)
United States
China Data
$1,477
-$11,040
$21,616
$60,321
Partner Data
$9,919
$14,326
$57,783
$124,913
Prepared by Georgetown Economic Services
Percent Divergence
-85%
-177%
-63%
-52%
#2 Is the Yuan Undervalued
• NAM has argued that Yuan is undervalued by
40%
• Undervalued currency is an export subsidy and
a surtax on U.S. exports
• Since Asian financial crisis, other Asian
countries have pegged their exchange rates to
the yuan/dollar.
• China is the most egregious but an overall Asian
problem
#3 Does the undervalued yuan hurt
the United States?
China's Indexed Foreign Exchange Reserves and China's
Indexed Surplus with the U.S., Annually 1995-2004
900
Indexed Value (1995=100)
800
700
600
500
Indexed Surplus
400
Indexed FER
300
200
SO U R C E:
Of f icial St at ist ics of t he U.S.
Depart ment of Commerce,
IM F Int ernat ional Financial
St at ist ics
100
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Prepared by Georget own Economic Services
Year
#3 Does the undervalued yuan hurt
the United States?
• Trade deficit for 2004 was 162 billion,
highest bilateral trade deficit
– Undervalued currency a tax on U.S exports
– A subsidy on Chinese exports to the U.S.
• Foreign exchange reserves over $600
billion, 80% held in U.S. dollar reserves
– Foreign investment is cheap in China
– Speculative flows increasing as rumors
spread
#3 Does the undervalued yuan hurt
the United States?
• NAM estimates that U.S. manufacturing
has suffered
– 60% of imports from China displace U.S.
production; 40% at expense of other suppliers
– Price pressure on domestic suppliers
– Manufacturing jobs declined by 2.8 mil since 2001
#4 Does manipulation help China?
Foreign Direct Investment in China
160
150
140
Billions of U.S. Dollars
130
120
110
100
Total FDI Contracted
90
Total Utilized FDI
80
US Share of Total Utilized FDI*
70
US Share of Total FDI Contracted*
60
50
40
* Estimat ed f or 2004
30
Source: China M inistry of Commerce
20
10
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Year
Prepared by Georget own Economic Services
#4 Does China’s Exchange Rate
Manipulation Help China?
• Foreign direct investment in China exceed
$60 billion, second only to US
• Economy growing at 9.5%
• China needs to create 15-25 million jobs
• Hurts China in long run:
– Overheated economy
– Inflation increases
Table 1: China's Economic Indicators, 2000-04
Source: PRC National Bureau of Statistics (NBS, www.stats.gov.cn) China Statistical Yearbook, 2003
Notes: *Of enterprises with sales of more than RMB 5 million; **According to official NBS figures, which
do not include under-employment or the migrant population
2000
2001
2002
2003
2004
8,946.8
9,731.5
10,517.2
11,725.2
13,651.5
Real GDP growth (%)
8.0
7.5
8.3
9.3
9.5
Fixed-asset investment
10.3
13.0
16.9
27.7
25.8
Value-added industrial output*
17.8
11.6
16.5
27.3
16.7
Retail sales
9.7
10.1
11.8
9.1
13.3
Consumer price index (%)
0.4
0.7
-0.8
1.2
3.9
Urban disposable per capita income (RMB)
6,280.0
6,859.6
7,702.8
8,472.2
9,422
Rural net per capita income (RMB)
2,253.4
2,366.4
2,475.6
2,022.2
2,936
3.1
3.6
4.0
4.3
4.3
GDP (RMB billion)
Urban unemployment rate (%)**
#5 What is Congress Doing?
• Schumer/Graham (S. 295): Authorizes negotiations
on currency and if not successful, apply 27.5 %
import duty
• Stabenow (S. 14): Apply 27.5% import duty if China
doesn’t revalue yuan
• Collins/Bayh (S. 593): Provisions on countervailing
duties apply to non-market economy countries
(e.g., China)
• Lieberman: Requires negotiation and appropriate
action against currency manipulation
#5 What is Congress Doing?
• Sanders (H.R. 728): Withdraw normal
trade relations treatment.
• English (H.R.1216): Apply countervailing
duties against non-market economy
countries (e.g., China)
• Ryan/Hunter (H.R. 1498):Exchange rate
manipulation subject to countervailing
duties and China safeguard actions
Legislation
Pros
Cons
Schumer/Stabenow
Comprehensive; applies 27.5% duty
across the board
WTO illegal – violates Article 1&2 – MFN
and bound concessions
Lieberman
Comprehensive: negotiation and
“appropriate” action
No definition of “appropriate”
Sanders
Comprehensive: withdraws MFN, but
doesn’t address what tariff will be
WTO Illegal: WTO requires unconditional
MFN treatment (Article 1)
Collins/English
Applies countervailing duties (CVD)
against subsidies
Treats China like other WTO members
WTO legal
Product-by-product (pro and con)
Injury test
Doesn’t specifically address currency
manipulation: Commerce would have to
make determination
Ryan/Hunter
Applies CVD against subsidies;
defines currency manipulation as
prohibited export subsidy
Treats China like other WTO members
Currency manipulation a
“consideration” in 421 safeguard case
Prohibits government procurement
when market disruption exists
WTO legal
Product-by-product (pro and con)
Injury test
Status of Legislation
• Schumer’s bill will be voted on by August
• Bayh/Collins will have hearing in Finance
Committee
• Ryan/Hunter has 60+ co-sponsors
– Because of defense provisions, has dual
oversight
• English has 34 co-sponsors; referred to
Ways and Means Committee
Exchange Rate Scenarios
• IMF proposal:
– Move to more flexible exchange rate (appreciation)
– Drop hard peg; move to basket of currencies
– Broaden the band from the current 1%
• Treasury: adopt floating exchange rate
– Capital markets still closed and weak
– Danger that currency will depreciate
• CCC: Appreciate by 40% but maintain peg
– Basket and broader band acceptable but not priority
Possible Revaluation Scenarios
• Market predicting small appreciation (58%), a wider band (only 1% currently);
and based on a basket of currencies.
– May be too modest to result in significant
adjustment
What’s next?
• Pressure mounting on euro and other
market determined currencies
• U.S. under pressure to reduce twin
deficits.
• Imbalances becoming more extreme
• Search for a soft landing:
– Pressure on China to realign
– Multilateral accord similar to Plaza Accord
Lessons learned
• China does not move unless forced to
move
– China understands and respects power
– Failure to use it; lose it
• China will threaten and bluster
• Important to stand firm and defend U.S.
interests.
Robert B. Cassidy
Collier Shannon Scott
3050 K St. NW
Washington DC 20007
202-342-8400