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The United States has taken another pop at China's foreign exchange regime in a misleading attempt to appease its domestic trade protectionists.
After deciding to reimpose quotas on China-made cotton trousers, cotton knit shirts and underwear last Friday, the Bush administration went even further on Tuesday and pressed for a revaluation of the renminbi in retaliation to the perceived threat posed by Chinese exports.
Such an outrageous intervention in the course of China's foreign exchange reform, which the government has decided to prudently carry out, would cause trouble further down the road and fail to address the out-of-control US trade deficit.
On one hand, it constitutes a serious infringement on the sovereign right of China to choose an exchange rate system in line with its national conditions.
Such foreign pressure only worsens the climate for exchange rate reform by fuelling market speculation. The inflow of vast sums of international "hot money" and the potential impact of its withdrawal serve only to complicate China's shift toward a more flexible exchange regime.
On the other hand, it sends the wrong message to protectionists in the US that their government is willing to find scapegoats for tough domestic issues.
The US registered a trade deficit of US$618 billion in 2004, equivalent to a record 6 percent of its gross domestic product. Its largest bilateral trade deficit was with China.
Some people therefore blamed China for the worsening condition of US trade, ignoring the fact that US export restrictions had greatly distorted bilateral trade that would otherwise be more balanced. They insisted that China's current dollar peg had resulted in competitive strains on US manufacturers.
But that argument sinks like a stone in the face of any objective analysis of China's multilateral trade statistics.
As an emerging world manufacturing base, China's imports from, and exports to the rest of the world both soared last year. And the small trade surplus in comparison with its trade volume was evidence of the country's comparative advantage of abundant, cheap and relatively skilled labor.
And contrary to US beliefs, more and more observers around the world are recognizing that it is the expanding US trade and budget deficits that threaten the balance of global trade.
But in spite of this, the US has chosen to point the finger at other nations instead of sticking to free trade or getting its fiscal house in order.
The US adoption of unfair textile barriers on Chinese exports just after the phasing out of the 10-year-old quota system dealt a heavy blow to the credibility of the world's largest economy's commitment to free trade.
Its interference in China's foreign exchange reform has posed imminent danger to a world economy largely powered by the sound growth of both economies. Escalating economic tensions will not solve domestic difficulties in the US and only undermine global trade growth.
As China embarks on foreign exchange reform, it needs to take care of its financial sector among others. Similarly, the US must take concrete domestic steps, not cheap and lazy protectionist measures, to restore its trade balance.
(China Daily May 20, 2005)
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