China manipulates its currency. By deliberately holding down the exchange rate of the yuan, it’s made its exports artificially cheap and done real harm to producers in other countries, including the U.S. Although the yuan has appreciated by 11 percent since Obama took office, the increase in China’s foreign reserves demonstrates that the currency is still cheap. The country’s rising dollar reserves also show how much China is helping to finance the U.S. budget deficit.
China isn’t alone. It just happens to be the biggest offender. Others include Japan, which is on track to edge out China as the U.S. government’s largest creditor.
Hence, the U.S. needs to take a fairer, more comprehensive approach in its efforts to restore global balance. Rather than singling out China, the U.S. should bring currency policy under more effective review, either through the International Monetary Fund or the World Trade Organization. Member countries should promise to allow movement of currencies toward levels that would reduce trade imbalances. The WTO could decide when and how to punish those who failed to comply—an approach that would insulate the process from such vagaries as the outcome of the U.S. presidential election.
The Chinese, for their part, should recognize that strong multinational oversight is in their best interests. The WTO and its predecessor, the General Agreement on Tariffs and Trade, were designed to help governments promote trade through exchanges of concessions: You lower your import barriers, I’ll lower mine. The idea that opening up to trade hurts your economy unless you’re compensated for it is bad economics, but it’s good domestic politics in that it helps curb protectionist passions. That’s why the international trade-policy system has worked so well. The WTO has been aptly described as a disarmament treaty for mercantilists.
Unfortunately, China—like many other WTO members—seems more interested in mercantilism than disarmament. Since it made the bold move of joining the WTO in 2001, its trade bureaucrats have settled into a narrow-minded litigating mode, seeking gains where they can, using delay to shield temporary trading advantages.
That’s a pity. China in the next few years has to rebalance its economy away from investment and exports and toward consumption and imports. Greater enthusiasm for the underlying purposes of WTO membership would help advance domestic economic reform and deflect the foreign criticism that China resents.
The global trading system suffers from a lack of leadership. The narrow U.S. focus on China’s bad behavior and its own agenda of preferential trade deals underscores the point. Although the multilateral system has survived the global economic slump better than many expected, it’s no thanks to the efforts of governments to strengthen it.
The U.S., as the WTO system’s architect, should reaffirm its commitment to the larger idea. So should China. Theirs is already the most important bilateral relationship in the world. They can help themselves—and everybody else—by forming a partnership to strengthen the multilateral trading system.