IT TAKES a lot to get Alan Greenspan on an airplane these days. He has enough to do at home: tend to the economy, develop monetary policy that can cope with the profligate fiscal policy concocted by the president and the Congress; and begin packing up so that he can be out of the door when his term as Federal Reserve Board chairman expires at the end of January. But this week he is off to Beijing.
The Treasury was scheduled to deliver a report to Congress this month in which it would have to decide whether to name China as a currency manipulator.
Since it is clear to everyone that China is artificially depressing the value of its yuan, this presents Treasury secretary John Snow with a problem. If he brands China as a currency manipulator, he will face calls for action from congressmen who have been demanding a 27.5% tariff on all imports from China — their estimate of the extent of the undervaluation of the yuan.
With the trade deficit set to rise to more than 6% of GDP — for some reason considered by experts to be unsustainable — support for a restriction on imports from China would then gather force. Indeed, President George Bush has already been forced to bow to protectionist pressure by limiting imports of some clothes made in China.
That’s why chairman Greenspan, who fears that rampant protectionism could bring on a worldwide recession, is hopping on a Beijing-bound plane with secretary Snow.
The White House is hoping he can help it find a way to avoid hanging the label “manipulator” on China when the Treasury submits its delayed report to Congress next month.
China’s decision to allow a limited float of its currency, which has recently appreciated a tiny bit, will give Greenspan and Snow something they can hold up as a positive development, but it is unlikely to be enough to appease the trade hawks in Congress.
My own guess is that Bush is gambling that the Fed chairman’s prestige, endorsing a statement that things are moving in the right direction, and saying that the deficit has multiple causes in addition to the undervaluation of the yuan, will head off Draconian protectionist measures, something that reassurances by Snow alone could not accomplish.
This strategy carries something of a risk for the administration. Greenspan is known to be upset by the fiscal deficit, which he feels is contributing to the global imbalances that must sooner or later result in a decline in the dollar, rising interest rates, higher inflation, and pressure on the Fed to tighten up even if the economy softens.
He might well accompany reassurances to Congress about the direction of Chinese trade policy with a blast at the White House and Congress for failing to get America’s fiscal house in order.
The president is already under pressure because of his delayed reaction to the devastation caused by hurricane Katrina, and from his conservative supporters because of his refusal to appoint a distinguished conservative constitutional lawyer to join the estimable John Roberts in the Supreme Court, so the last thing he needs is a public dressing-down by Greenspan.
Although China is Congress’s favourite whipping boy, the increase in America’s trade deficit is not due to the flood of Chinese imports alone. The high price of oil will accelerate the flow of dollars to Middle Eastern and other producers. So will imports of petrol from Europe and elsewhere.
The apparent decision by American consumers to shun the big petrol-guzzling sports-utility vehicles that are the mainstay of the profits of American carmakers will probably increase imports of Japanese and other foreign vehicles that consume less petrol per mile. And the slow growth of Europe’s economies is shrivelling the market for American exports.
Nor is the rising trade deficit due solely to China’s interventions in currency markets. Chinese labour costs are so far below those in the United States that even a major upward revaluation of the yuan would be unlikely to stem the flow of textile and other products that have a high labour content.
And revaluation would not help key American exporters unless accompanied by the Chinese regime’s willingness to crack down on the piracy that is depressing our exports of intellectual property. China’s persistent refusal to crack down on the piracy of software, films and other intellectual property has important lobby groups, the White House and Congress up in arms.
Commerce secretary Carlos Gutierrez told the American Chamber of Commerce in a speech in Beijing a few months ago: “Intellectual property rights violations are a crime and we don’t believe that we should be negotiating crimes with our trading partners.”
Besides, those politicians who want to cut imports from China had better be careful what they wish for.
China uses the flood of dollars that it receives for its goods to buy US Treasury bills, thereby keeping interest rates lower than they would otherwise be. These low interest rates are fuelling the housing boom, and the increase in house values allows consumers to cash in some of the equity so that they can continue the buying binge that has kept the economy growing at 3.5%-4%.
Should a reduced flow of dollars cause the Chinese authorities to cut back their purchases of American IOUs, especially at a time when some sectors of the economy are showing a bit of weakness, Congress might find that it has indeed reduced Americans’ appetite for imported goods — by causing a recession.
America is lucky that it still has Greenspan to call on. He might just be able to come up with a solution that propels China in the right direction, at a pace sufficient to stifle Congress’s protectionists, but slow enough to avoid facing his successor with a currency crisis as he moves into the chairman’s seat.
Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute
