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Threats To World Trade

March 15, 2010

An article in The New York Times (China Uses Rules On Global Trade To Its Advantage) illustrates the mounting public relations battle between the US and Chinese administrations, following this weekend’s denial by the Chinese leadership of the need for change in its current economic policy.

The debate centers around the ‘fairness’ of Chinese policy and its impact on trade imbalances, in particular regarding the value of the Chinese currency, the renminbi. There is broad consensus that the renminbi is under-valued and of course this makes Chinese exports more competitive – and has supporrted the growth of a huge trade surplus.

The New York Times suggests that Chinese manipulation is expanding to the way it uses world institutions, such as the WTO. It emphasizes how, in the last 12 months, “Beijing has filed more cases with the W.T.O.’s powerful trade tribunals in Geneva than any other country complaining about another’s trade practices”. While this is strictly true (China filed 4 of the 15 cases, versus 3 filed by the US and 2 each by the EU and Canada), it is an example of the selective reporting that undermines meaningful discussion. For example, if we select a period starting on January 1st 2008, rather than just the past year,  the United States filed 10 complaints, compared with just 9 by China and 9 by the EU (out of a global total of 36). So when the U.S. files, are we to conclude that it is never doing so ‘to gain advantage’, yet when China uses the same institution, it must somehow represent an attempt to manipulate?

As this week’s Economist points out, (Yuan To Stay Cool), upward appreciation of the Chinese currency is desirable and is in all interests, including those of China. But rebalancing of the negative trade balances that have been allowed in countries such as the U.S., the UK, Greece, Spain, Ireland etc is also necessary. The problem is that the imbalances have grown to a point where action can only be gradual; the economic shock of rapid action would be too much for these countries (and their population) to bear.

The real point of this debate is that as with any trading relationship, all parties are ultimately in this together – and need to work together to make things better. This requires careful judgment over how public to make their debates and what arguments they should use to assist a successful conclusion. The tactics of this negotiation are important for us to observe – both as a learning experience and also because their outcome will have a substantial effect on the living standards and career prospects of us all.

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