U.S. President Barack Obama and Republican candidate Mitt Romney keep promising to be tough on China. Although their grievances are legitimate, simple-minded China-bashing is a dumb way to pursue them. Both countries will have to wise up if they want global trade to work to their benefit.
Romney’s pledge to declare China a “currency manipulator” as soon as he takes office is probably an empty threat. As Romney well knows, such a move -- tantamount to imposing trade sanctions -- would have little effect on China’s policies and spark a trade war that would hurt the U.S. at least as much as China.
That said, China does manipulate its currency. By deliberately holding down the exchange rate of the renminbi, it has made its exports artificially cheap and done real harm to producers in other countries, including the U.S. Although the renminbi 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 still helping to finance the U.S. budget deficit -- another complication for Americans who want to get tough.
China, though, isn’t alone in managing its exchange rate to boost exports. 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 China out, the U.S. should work toward bringing 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 political vagaries, such 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 contain 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 the country 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 faces an enormous challenge in the next few years as it rebalances its economy away from investment and exports toward consumption and imports. Greater enthusiasm for the underlying purposes of WTO membership would serve China well as it seeks to curb protectionist sentiment at home and withstand pressures from trade partners such as the U.S. It would help to move domestic economic reform forward and deflect the foreign criticism that China resents so acutely.
A fuller commitment to the principles of WTO membership would require a whole new approach. It can’t remain a selfish user and gamer of the system. It can’t stand aside and let trade negotiations fail, as it did during the latest Doha Round. It can’t concentrate on developing preferential trade agreements in Asia -- deals that are true to the letter but not to the spirit of the WTO rules. Rather, it should focus on strengthening an international regime that offers the best guarantee of the liberal trading order on which its prosperity will depend.
The global trading system suffers from a lack of leadership. The U.S.’s narrow 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 architect of the WTO system, should reaffirm its commitment to the larger idea. So should China. Theirs is already the most important bilateral relationship in the world. They can benefit themselves and everybody else by forming a partnership to strengthen the multilateral trading system. More goodwill and a lot more ambition on both sides will be needed to make it happen.
Today’s highlights: the editors on abortion, rape and politics; Margaret Carlson on how Hurricane Sandy affects the presidential campaign; Noah Feldman on the next U.S. president’s Supreme Court picks; Edward Glaeser on how San Francisco beat Detroit in the economic race; Jeffrey Goldberg on whether Romney is “going soft” on Iran; Ramesh Ponnuru on his hopes for a Romney presidency; A. Gary Shilling on the beneficiaries of low interest rates; Richard Vedder on those stifling the online revolution in higher education.
To contact the Bloomberg View editorial board: firstname.lastname@example.org.