Uh oh. It looks like President Obama is done playing good ol’ Mr. Nice Guy to China. During the APEC Summit in Hawaii earlier this week, he expressed his frustration with the lack of action by Chinese officials to revalue the yuan, saying, “Enough’s enough.”
Although Obama acknowledges that it is politically difficult for China to implement the changes he’s asking for, it seems like he cannot just let China get away with an unfair trade advantage. Remember that the U.S. argues that China is keeping its currency artificially low to make its exports relatively cheaper to acquire, consequently driving up its trade surpluses while putting American business at a disadvantage.
Of course, Chinese officials issued a comeback against Mr. Obama’s statement, which in Big Pippin‘s words, goes something like “What are you talkin’ about, bro?” According to the Chinese Foreign Ministry, the U.S. shouldn’t blame its problems on the yuan exchange rate as the appreciation of the currency won’t solve any of them.
Chinese President Hu Jintao also maintains that they are being responsible with their exchange rate policy. He has the data to back up his claim too! Ever since China ended its two-year peg to the dollar, the yuan has gained about 8% in nominal terms. Taking inflation into consideration, USD/CNY has dropped more than 10%.
Besides, the most recent economic data from China doesn’t appear to show signs that the economy is enjoying a trade advantage at all. Its trade balance report for October disappointed expectations for a third consecutive month, printing a 17 billion USD surplus while analysts eyed it to come in at 26.3 billion USD. Digging deeper into the report, I found out that China’s exports actually rose at its slowest pace in two years!
With that, it looks like neither the U.S. nor China is going to give in anytime soon. All that stubbornness has gotten several political and economic analysts worried that these two superpowers could be on the brink of a trade war. *Gasp!*
Recall that tensions already flared last month when the U.S. Senate voted on a law that would allow U.S. companies to charge import duties on Chinese goods in order to compensate for the undervalued yuan. House Speaker John Boehner warned that this legislation was dangerous in that it could pose several risks and unintended consequences while a spokesperson from the Chinese foreign ministry echoed the same sentiment and claimed that the proposed currency bill is a violation of the World Trade Organization’s laws.
Still, the U.S. insists that it only has the world’s best interests at heart and that asking China to revalue its currency is aligned with its goals to establish an Asia-Pacific trade accord along with eight other nations next year. See, it ain’t war they want! In fact, it’s actually quite the opposite! Or so they say.
Apparently, Asia’s rising commercial importance has caught President Obama’s attention. He pointed out that the U.S. exported more products to the Asian region than in Europe this year and that this trade activity supported roughly 850,000 jobs in the U.S. No wonder Obama believes that the Asia-Pacific region is “absolutely critical to America’s economic growth”!
Aside from seeking fairer trade practices, the U.S. also plans to form an alliance with Australia, China’s trade BFF. Through the years, China has risen to become Australia’s number one trade partner, beating both Japan and the U.S. Meanwhile, China is one of the top sources of imports for the U.S. as their trade deficit to the Asian nation reached 273 billion USD last year.
At the end of the day, both countries stand to benefit if China lets the yuan appreciate more freely. A strong yuan (or a weaker Australian dollar) would make Australia’s fuel and mineral exports relatively cheaper for Chinese manufacturers, boosting demand for Australia’s commodities. As for the U.S. and other Western nations, a strong yuan would level the playing field in terms of trade and help rebalance the global economy.
Of course all that’s easier said than done. While all these plans seem promising, China still has the ball in its court and they don’t seem ready to give in to Uncle Sam’s demands. I’ll make sure to keep you posted when things start to turn around!