With the unlikely election of Donald Trump as President of the United States, the outlook for global trade has suddenly become much more unpredictable. The US has some very legitimate grievances when it comes to China’s trade practices and currency manipulation, but just how far will Donald Trump push these issues. Will he overplay his hand? Will we have a trade war between the US and China? Will China retaliate by dumping US Treasuries?
China undervalues its currency in order to gain competitive advantage around the world. Everyone understands that and it needs to change, but the question in the United State is how to effectively change it. The Obama administration is taking the gradual approach:
The Obama administration on Tuesday declined to label China a currency manipulator after seeing recent increases in the value of the yuan compared to the dollar.
The decision angered some manufacturing groups, which have accused Beijing of artificially holding down the value of its currency to gain trade advantages. A cheaper yuan makes Chinese goods less expensive when they are shipped to the United States. It also makes U.S. goods more expensive in China. Both could increase the U.S. trade deficit with China, which is on pace to hit a record high this year.
The Treasury Department said the yuan has appreciated 12 percent against the dollar in the past 18 months, after adjusting for inflation. In addition, the department said in a semi-annual report that China promised at two high-level meetings last month to make the yuan’s exchange rate more flexible.
Still, yuan is “substantially undervalued” and its appreciation “is insufficient and more progress is needed,” the report noted. The department will “press for policy changes that yield greater exchange rate flexibility” and “level the playing field.”
This will likely end up being a campaign issue as Mitt Romney and other GOP candidates are hammering Obama over China. But progress is being made.
Executive Vice President Andy Palmer announces that Nissan will establish a global headquarters for Infiniti in Hong Kong from April 2012. This is a big move for the automaker and demonstrates the huge importance of the Chinese car market, particularly for luxury brands like Infiniti.
Tom Friedman writes often about China, and his latest column addresses current hot issues like currency valuation, manufacturing and trade. But this paragraph grabbed my attention:
But we also need to stop thinking that a middle class can be sustained only by factory jobs. Thirty years ago, Hong Kong was a manufacturing center. Now its economy is 97 percent services. It has adjusted so well that this year the Hong Kong government is giving a bonus of $775 to each of its residents. One reason is that Hong Kong has transformed itself into a huge tourist center that last year received 36 million visitors — 23 million from China. Their hotel stays, dining and jewelry purchases are driving prosperity here. The U.S. Commerce Department says 801,000 Mainland Chinese visited the U.S. last year, adding $5 billion to the U.S. economy. More Chinese want to come, but, for security reasons, visas are hard to obtain. If we let in as many Chinese tourists as Hong Kong, it would inject more than $115 billion into what is a highly unionized U.S. hotel, restaurant, gaming and tourism industry.
The United States needs to get beyond some of the over-zealous security restrictions imposed after 9/11 and let as many Chinese and other tourists come visit as possible. Tourism has helped to sustain Europe for years, and the U.S. needs to take advantage of this as well.
Many are interpreting this move as another push by the Obama administration to push China on trade.
President Barack Obama has chosen Commerce Secretary Gary Locke to succeed Jon Huntsman as U.S. ambassador to China – signaling a more focused White House effort to press Asia’s emerging economic superpower on trade issues, according to administration officials.
Obama could make the announcement as soon as Tuesday, a senior administration official said, adding that the president has yet to settle on a list of possible replacements for Locke, a former two-term governor of Washington. Locke’s departure from the cabinet had long been rumored.
Locke, 51, is a third generation Chinese-American with roots in Hong Kong and China’s coastal Guangdong province – and the first person of Chinese ancestry to serve as a U.S. governor. He is fluent in Cantonese and didn’t speak English until he was five years old.
This will be a huge campaign issue, and any progress will help the Obama administration. It will be interesting to see how the Chinese respond.