Has John Snow's China trip turned from expected blizzard to a light dusting instead? Secretary Snow and other U.S. Treasury officials in China are attempting to broaden their message beyond criticism of a supposedly undervalued yuan. Snow has spent the last few days urging China to modernize its financial, credit, equity, debt, and commodity markets. This is all fine advice, as far as it goes. China knows it must establish advanced financial institutions, markets, and services. It wants to do so. It is doing so. The process is already well underway, with functioning stock markets in Shanghai and Shenzhen, a new commodities market about to open in Shanghai, and rapidly developing consumer credit and mortgage markets. Of course, many interior agricultural areas are still very backwards. Snow also this week has been seeking greater market entry for U.S. financial and insurance companies. Again, this is welcome, if standard, rhetoric. If Treasury’s focus on Chinese market liberalization means less time to agitate over a yuan revaluation, so much the better.
Back in the U.S., however, an array of special interests is already calling Snow’s trip a failure. The Schumers and unions on the left and the manufacturers on the right can see as well as anyone that China’s President Hu Jintao has committed to a stable currency policy (as I noted in yesterday’s post). They worry that Snow has shifted his message to focus on China’s domestic financial services market. The groups are intensely pressuring Treasury to label China a “currency manipulator” in its biannual report on the topic due out in early November. Sen. Schumer, who temporarily pulled his 27.5-percent across-the-board tariff legislation this summer at the personal and public request of Fed chair Alan Greenspan, says he will re-launch his bid to tax all U.S.-China trade if China does not revalue the yuan.
Treasury’s shift in focus this week is welcome, but its earlier intense pressure for yuan revaluation fanned the flames of protectionist sentiment and legislation. Treasury either really did agree with the protectionists, or it egged them on for far too long. Maybe it was an ultra-clever negotiating position to bring back from China this week lucrative deals for U.S. firms. The strategy might partially work. But Treasury has still boxed itself in. The protectionists have gained far more support in Congress than anybody thought they could. In a surprising test vote this spring, the Senate gave more than 60 votes to Schumer’s tariff. Even Schumer was stunned, thinking initially his bill was just a sop to New York manufacturers. So Treasury’s indulgence of protectionist economic policy – whether a mistake or an overly clever ploy – has let popular myths fester and given hope to protectionists everywhere.
It now has three choices: (1) Capitulate to the protectionist lobby, and push forward with a weak-dollar/strong yuan currency policy, backed by threat of dangerous tariffs. (2) With cleverness and finesse, pacify the protectionists while doing as little harm as possible to the Pacific economic fabric known as the U.S.-China relationship. (3) With great courage, clear economic thinking, and pro-active communication, rebuff U.S. protectionists and stand up for free trade, capitalism, a growing China, and a prospering U.S. Number 1 appears a bit less likely today than it did a week ago. Number 2 will be tempting for all politicians, but Number 3 is important for the economy and for long-term global relations. A clear statement of currency stability and free trade will reduce monetary uncertainty, negate any chance of a trade war, and send a message to financial markets and to entrepreneurs that China and America are open for business.