The RMB Controversy and Beyond

As the US Congress departed from Washington for its long summer recess, more than a few members took time to put statements on the record, or to propose legislation, with regard to the following:

• The value of China's currency, the renminbi (RMB), against the US dollar;


• The rapid growth of Chinese exports to the United States;


• The growth of US investment in China, including manufacturing investment;


• The difficulties facing workers in the US manufacturing sector;


• The allegedly causal relationships among the preceding.

The executive branch felt the heat. Letters from Congress to the president and other messages from the Hill to the executive agencies urged the administration to convince China to float or revalue its currency against the dollar, or else to strike back at China for its alleged manipulation of the currency to cheapen its goods in US markets and suck employment-creating US investment into China. A publicity trip by cabinet members to midwestern plants unleashed a torrent of anxiety over China's economic prowess.

This wave of American resentment toward China is not universal. It is focused, as trade-related concerns have been in the past, on sectors of the US economy most directly affected by foreign competition. It is impelled forward in part by American companies facing diminished business prospects in a slow US economy, rising competition from Chinese rivals, and layoffs of American employees. It draws as well on familiar constituencies and political figures who, a few years ago, vigorously opposed US granting of Permanent Normal Trade Relations (PNTR) during the great congressional debate on PNTR. But it also includes the voices of some traditional supporters of expanded trade with China.

Concurrently, American textile trade groups are fiercely making the case that unless the US government acts quickly to protect endangered textile firms and workers, China's overwhelming prowess in textile and apparel manufacturing will doom the entire US industry.

On the non-trade front, ironically, the United States and China are getting along on the surface better than they have in years. There is cooperation on North Korea and counterterrorism. The two sides have reached a new maritime agreement after 10 years of discussion. The Chinese defense minister will soon visit Washington after years of estrangement between high military authorities in the two nations. The battles against HIV/AIDS and severe acute respiratory syndrome have brought about closer bilateral contacts. Old frictions seem under control for the time being.

Does the current furor over the RMB and China's impact on the US economy mean that despite these positive developments we are falling into a crisis with China? It could, but I don't think it does.

At the heart of this summer flareup is a paradox. No practically imaginable increase in the RMB's value would eliminate the very phenomena that have led to US demands for PRC action on the currency in the first place: rising exports to the United States, growing US investment in China, increasing competitiveness of Chinese firms both in the Chinese market and abroad, and job losses in the US manufacturing sector.

Widening the RMB trading band by 1 or 2 percent—a possible PRC response to American, European, and Japanese unhappiness over the RMB's value—will make little difference on those three fronts. Even if China takes the advice of some economists and undertakes a one-time revaluation of the RMB of, say, 15 or 20 percent, the move would not invalidate China's positive economic fundamentals: a large and rapidly expanding domestic economy, increasing technological and managerial sophistication, prospects for at least gradual further improvement in the Chinese business environment under World Trade Organization (WTO) rules, a high domestic savings rate, and a large supply of low-cost labor.

Unless those fundamentals shift—and it is no secret that China's economy lives under multiple threats ranging from high unemployment to the HIV/AIDS time bomb to a notoriously frail banking system—the recent pattern of interconnected, rapid economic growth and increasing foreign direct investment is likely to persist whether the RMB rises or not.

Out of this barely explored thicket emerge the following observations.

First, whether the US economy is in the midst of a relatively cyclical downturn or something more worrisome, the central policy issues facing the US economy are domestic ones. Focusing on the RMB question is no substitute for a forthright discussion between policymakers and the public about the causes of the current painful condition of certain sectors of the US economy and on how to respond to them. The abysmal US savings rate and continuing weakness in the country's education system are two perennial, but unresolved and very salient, issues.

Second, to the extent that those who have energized the fracas over the RMB realize that RMB revaluation is unlikely to make much difference to the deeper problems it is supposed to resolve, other motives may be at work. US economic and trade relations with China should not become a safety valve for the relief of domestic pressure simply because the search for long-term solutions to bigger economic questions proves politically difficult.

Third, China's decisive implementation of its outstanding WTO commitments is critical. Substantively, WTO implementation remains the key to major new opportunities for American businesses in China, while increased Chinese purchases of foreign goods and services will help to moderate the growth of China's trade surplus with the United States. Politically, the failure to demonstrate clearly its attainment of its WTO targets will leave China far more vulnerable to political and popular criticism in the United States.

While the current RMB controversy has evoked a modest "I told you so!" chorus from people who never wanted to see China in the WTO in the first place, the logic that prevailed in the US debate on PNTR in 1999 and 2000 remains valid. The United States and the world are far better off with China committed to global rules of the road and subject to WTO remedies if it violates those rules. The elimination of barriers to international products and services in China offers the best chance for key sectors of the American economy to maximize the benefits of China's broad economic emergence, and for China to maximize the benefits it enjoys in the global economy.

The controversy of the hour, sparked by the convergence of a slow US economy, the US dollar's decline against other key currencies, and the Chinese economy's rapid growth, points toward bigger, more tidal trends with which the United States must grapple. The problem was foreshadowed by the arrival of Japanese industrial might on the world scene in the 1960s and 1970s but is not altogether the same. By mastering the coordination of labor resources, advanced technology, and modern managerial skills, China and other lower-income developing countries are increasingly able to perform tasks that once could only be undertaken by the most advanced economies. (A cognate, sadly, of this economic trend in the national security arena is the widespread evidence of developing countries' progress toward the production of weapons of mass destruction.)

Thus, the anguish now felt in some parts of the US economy points not only to the pains associated with the low point of the business cycle, but also to longer-term and more difficult challenges for American policymakers and corporate strategists. Today's RMB controversy will likely fade; the bigger questions implied by China's arrival as an effective player in the global economy, with all the benefits and difficulties for China itself as well as for its global trade partners, will not. These questions require analysis, thoughtful policymaking, and international consultation. Unfortunately, if the present RMB firestorm is any example, the signals from Washington these days do not point in that direction.