China uses rules on global trade to its advantage


POSTED: Monday, March 15, 2010

HONG KONG—With China's exports soaring, even as other major economies struggle to recover from the recession, evidence is mounting that Beijing is taking advantage of international trade rules to spur its own economy at the expense of others, including the United States.

Seeking to maintain its export dominance, China is engaged in a two-pronged effort: fighting protectionism among its trade partners and holding down the value of its currency.

China vigorously defends its economic policies. On Sunday, Premier Wen Jiabao criticized international pressure on China to let the currency appreciate, calling it “;finger pointing.”; He said that the renminbi, China's currency, would be kept “;basically stable.”;

To maximize its advantage, Beijing is exploiting a fundamental difference between two major international bodies: the World Trade Organization, which wields strict, enforceable penalties for countries that impede trade, and the International Monetary Fund, which acts as a kind of watchdog for global economic policy but has no power over countries like China that do not borrow money from it.

China had a $198 billion trade surplus with the rest of the world last year, with its exports to the United States outpacing imports by more than 4-1. Despite that, in the last 12 months, Beijing has filed more cases with the WTO's powerful trade tribunals in Geneva than any other country complaining about others' trade practices.

In addition, Beijing has worked to suppress a series of IMF reports since 2007 documenting how the country has substantially undervalued its currency, the renminbi, said three people with detailed knowledge of China's actions.

China buys dollars and other foreign currencies—worth several hundred billion dollars a year—by selling more of its own currency, which then depresses its value. That intervention helped Chinese exports to surge 46 percent in February compared with a year earlier.

Many prominent academic economists see a basic contradiction in the global system of oversight on trade and currency.

“;Many of us would like to see the WTO-style commitments—with people's feet being held to the fire—at other international agencies, like the IMF,”; said Jagdish Bhagwati, a Columbia University economist.

Western countries had hoped last year to bring international pressure to bear on China, after years of complaining that Beijing keeps the renminbi artificially low.

An undervalued currency keeps a country's exports inexpensive in foreign markets while making imports expensive. That makes a trade surplus more likely, reducing unemployment for that country while increasing unemployment in its trading partners.

Last September, President Barack Obama, President Hu Jintao of China and other leaders of the Group of 20 industrialized and developing countries agreed in Pittsburgh that all the G-20 countries would begin sharing their economic plans by November. The goal was to coordinate their exits from stimulus programs and prevent the world from lurching from recession straight into inflation.

The G-20 leaders agreed that the IMF would act as intermediary.

But two people familiar with China's response said that the Chinese government missed the November deadline and then submitted a vague document containing mostly historical data. These people said that China feared giving ammunition to critics of its currency policies at the monetary fund. and beyond. Both people insisted on anonymity because of China's sensitivity about its economic policies.

If China is found to be manipulating its currency, it could be a political and economic challenge for the Obama administration. Obama called on Thursday for China to introduce “;a more market-oriented exchange rate.”; China's defiant response keeps the administration in a difficult position.

China is the biggest buyer of Treasury bonds at a time when the United States has record budget deficits and needs China to keep buying those bonds to finance U.S. debt. But the Treasury also faces an April 15 deadline for whether or not to list China as a country that manipulates the value of its currency.

If China is listed, that could embolden members of Congress to seek restrictions on Chinese exports to the United States. China would certainly criticize such retaliation as protectionism, leading to a broader deterioration in already strained bilateral relations.

China loudly defends its currency interventions, and is starting to describe them as stimulus. But unlike extra government spending in the United States and other countries, currency intervention does not expand global demand, but shifts it from other countries to China.

Two closely related scourges played a central role in the collapse of world trade in the 1930s: protectionism and beggar-thy-neighbor currency devaluations. World leaders set up two institutions after World War II, now known as the WTO and the IMF, to reduce the risk of another Great Depression.

Unlike its predecessor, which had weak arbitration panels whose rulings could be easily blocked by the losing country, the trade organization has had powerful tribunals since 1995. These tribunals can clear the way for the imposition of sanctions running into the billions of dollars.

Filing a case against another country is the heaviest artillery available to countries in trade disputes. But it also is expensive. Preparing a case and pushing it through a tribunal can easily require millions of dollars in legal expenses, and low-income countries seldom file them.

China joined the WTO in 2001 and in its first seven years filed only three cases. But it has stepped up its pace recently, and has filed four of the 15 cases in the last year: two against the United States, on poultry and tires, and two against the European Union, on steel fasteners and poultry.

The monetary fund has not acquired similar powers to the trade organization.

IMF policies call for it to disclose documents and information on a timely basis, with the deletion only of market-sensitive information. But under the rules a member country may decide to withhold a report, an organization official said.

China allowed the release of its reports until the monetary fund's executive board decided in June 2007 that reports should pay more attention to currency policies. China has quietly blocked release of reports on its policies ever since, without providing its specific reasons to the IMF.

A person who has seen copies of the most recent report last summer said that the staff had concluded that the renminbi was “;substantially undervalued.”;

The IMF regards a currency as substantially undervalued if it is more than 20 percent below its fair market value.

More than four-fifths of the IMF's members allow publication of the agency's annual staff reports on their economies. Countries blocking release are mostly tightly controlled places like Myanmar, Sudan, Turkmenistan and Saudi Arabia, although Brazil has also not released its reports.

China's central bank did not respond to calls and fax messages seeking comment.

The main indicator of a country's intervention in currency markets is its level of foreign reserves. China halted the gradual appreciation of the renminbi against the dollar in July 2008; from June 30, 2008, through Dec. 31 of last year, China's foreign exchange reserves rose by $590 billion. A small part of the increase reflected interest on bonds, the appreciation of stocks and currency fluctuations.