This weekend, the International Monetary Fund, at its annual meeting, sought consensus on restructuring the global economy. In its concluding communiqué, the organization said it would “work toward a more balanced pattern of global growth, recognizing the responsibilities of surplus and deficit countries.”
In other words, the IMF decided to do nothing. “The language is ineffective,” conceded IMF Managing Director Dominique Strauss-Kahn. “The language is not going to change things. Policies have to be adapted.”
Now, nations are looking to the upcoming meeting of the G20, scheduled for next month in Seoul. It’s unlikely, however, that anything can be accomplished there either. There can be no rebalancing of the global economy until the planet’s chief exporter decides to export less and consume more. And China cannot do those things until it changes its currency policies. Beijing, however, is adamant, vowing not to do that.
Nations, led by the United States, want the Chinese to allow the renminbi to float. Due to daily intervention by China’s central bank, the yuan, as the currency is informally known, “trades” somewhere between 25 to 40 percent below its value. Beijing keeps the renminbi artificially low to give its exporters substantial price advantages.
Because China won’t act, the country will continue to rack up outsized trade surpluses and accumulate foreign exchange reserves. And as the Chinese do so, the global economy becomes even more imbalanced.
Analysts say the United States should save more to rebalance the global economy, but as a practical matter it will be hard for it to do so as long as the Chinese flood the world with liquidity by investing offshore the proceeds from their exports. So Beijing is preventing the adjustments that have to occur.
Because the international community cannot force the Chinese to change their predatory currency policies, it is up to Washington to do something. The House of Representatives did just that at the end of last month. By a 348-79 margin, the chamber passed legislation directed at countries undervaluing their currencies. The primary target is, of course, China.
China, naturally, does not like the bill: H.R. 2378. A statement from the Foreign Ministry hinted the measure would hurt the global economy, referring to “damage to the interests of both peoples and people around the world.”
The Chinese, however, were not alone. Critics have been lining up to take shots at the bill, lambasting it as “protectionist.” Just about every analyst thought the measure, strongly supported by Speaker Nancy Pelosi, was “political.” Opponents of the bill will get another shot when the Senate takes up the matter in the promised lame-duck session—or when a currency bill is filed in the new Congress next year.
The technical issues relating to the Chinese currency are exceedingly complex, undoubtedly the most involved of all the contentious trade matters involving the United States and China. Not surprisingly, there is at least a measure of truth to almost every criticism of H.R. 2378.
Nonetheless, the national debate about China’s currency policies ignores the single most important point about them. And that point has nothing to do with the economic merits of the matter.
China, unfortunately, considers every economic advantage a geopolitical weapon. We saw this clearly last month when Beijing informally cut off the export of certain rare-earth minerals to Japan as a means of getting Tokyo to release a Chinese fishing boat captain who had rammed two Japanese patrol vessels in disputed waters. Japan is the world’s largest consumer of rare-earths, so the ban, although unofficial, was an inherently hostile act. Furthermore, the export ban was a clear violation of China’s World Trade Organization obligations.
The West, in its optimistic days, had assumed China could be integrated into the global system of commerce and, once so enmeshed, would become a cooperative member of the global community. Yet today, nine years after its accession to the WTO, Beijing does not appear to have been constrained by participation in trade. After all, to gain a short-term advantage in its recent dispute with Japan, China was willing to lose its hard-won reputation as a reliable supplier.
Consequently, every economic advantage we extend to China gives its leaders one more tool to advance their geopolitical schemes—many of which are directed against us. So, economic arguments against H.R. 2378, however persuasive, are beside the point. China’s currency, in substance, is a national security matter.
Gordon G. Chang is the author of “The Coming Collapse of China.” He writes a weekly column at Forbes.com. Follow him on Twitter @GordonGChang.
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