China dodged a bullet on Nov. 28 when the Bush Administration decided against formally branding it a currency manipulator. Unfortunately, the Administration's mild rebuke of China's management of the yuan provides little practical relief for the small and midsize U.S. companies that must compete against goods priced in China's cut-rate currency. Even worse, the White House risks losing credibility with not just China but also the U.S. Congress, which may feel emboldened to pass protectionist legislation.
We appreciate the Administration's dilemma. The Chinese had already let their currency rise slightly this summer. So by cooling the currency rhetoric, the Bush Administration probably hopes to free People's Bank of China Governor Zhou Xiaochuan and other reformers to continue to let the yuan appreciate modestly in 2006, as some signs indicate.
Moreover, Chinese businesses are not the only beneficiaries of the low yuan. Many "Made in China" products consist mainly of components imported from other countries such as Japan, South Korea, or Taiwan and then assembled in China. And foreign-backed exporters, including China-based affiliates of large American corporations, reap big gains from China's undervalued currency.
Still, Beijing's official currency policy is the main enabler of this complex web of alliances, and U.S. policymakers must exert public pressure for more results like those of last spring. In its May, 2005, currency report, the U.S. Treasury warned China that it was likely to be designated a currency manipulator if it didn't substantially alter its exchange-rate policies. On July 21, China announced that it was permitting a modest 2.1% revaluation of the yuan against the greenback.
Although both sides provided lots of diplomatic cover for the shift, the truth is that China responded only after being threatened with the `manipulator' label. Since the Treasury's latest currency report suggests that China's new exchange-rate system "remains, in practice, a tightly managed currency peg against the dollar," strong action still seems warranted.
That's why we think President Bush missed an opportunity to send a clear message that China, which is staking much of its near-term economic future on its exporting prowess, must play by global trade rules. Otherwise, the Administration's frequent assurances of the benefits of increased trade will continue to ring hollow with American workers.