Yuan not the only tool to help ease US trade deficit

Wang Xiangwei
12 April 2010

Given the flurry of high-level exchanges between Beijing and Washington in the past few days and those set to happen in the next few weeks, the consensus is that China is set to resume the gradual appreciation of the yuan by widening the trading band. The only difference is over the timing and the scale of the revaluation.

US Treasury Secretary Timothy Geithner’s surprise meeting on Friday with Vice-Premier Wang Qishan has added more optimism about a shift in the mainland’s currency regime.

Some have suggested that such a shift could be a matter of days away as President Hu Jintao is heading to a nuclear summit in Washington today and is scheduled to hold a summit meeting with his US counterpart, Barack Obama. The mainland leadership is known for making a goodwill gesture ahead of an important summit with an American president. Others have speculated that the shift could come later, in the run-up or soon after the second US-China Strategic and Economic Dialogue, to be held in Beijing in late May.

The resumption of the yuan’s appreciation will no doubt help ease the bilateral tension over the currency in the near future, but it would do little to help save American jobs and cut the huge trade deficit the US runs with foreign countries – the two major reasons cited by American politicians to force a change in Beijing’s currency policy in the first place.

Indeed, many economists have agreed that America’s core problem is its low saving rate, not China, and US consumers benefit more from low-cost goods made in China.

If the mainland revalues, the labour-intensive and low-margin industries mostly owned by foreign businesses are likely to move out of China and into other countries such as Vietnam. This means the US trade deficit will remain big, and American jobs will still be lost.

Some US politicians like to say it is in Beijing’s interest to allow the yuan to appreciate, as this will help dampen inflation and rebalance the mainland economy towards more domestic consumption.

While this may sound true in the long term, there is no way Beijing can revalue as much as and as fast as US politicians have demanded.

More importantly, while most overseas economists agree that the yuan is undervalued, there is no agreement on how much it is undervalued, with the estimates ranging from 10 per cent to 40 or 50 per cent. But that is what the US politicians and overseas economists said before Beijing was forced to allow the yuan to jump 2 per cent overnight against the dollar and widen the trading band in 2005. Since then, the yuan appreciated about 20 per cent until mid-2008, when the government halted the yuan’s rise in response to the global economic crisis.

Even if Beijing lets the yuan rise again, the appreciation is expected to be very small, and it would take a long time before it would rise enough to make any noticeable impact on the US trade deficit.

But there are other ways Beijing and Washington can work together to reduce the trade deficit and create more American jobs more effectively. Washington should take more forceful measures to persuade Beijing to remove non-tariff barriers, including tax rebates and quotas, against American goods.

Beijing should also realise it is in its best interests to encourage more purchases from the US by cutting its taxes, including customs tariffs and value-added taxes. In fact, Beijing wants to buy a lot more from Washington but cannot. The top item is hi-tech products, but Washington has been reluctant because such products may have military applications. So Beijing’s previous buying missions to the US have focused on the big items such as automobiles and airplanes. There are only so many jumbos Beijing can buy, and US automakers already have their cars assembled in China.

Still, Beijing can expand its buying spree as it undertakes important measures to boost domestic spending and improve people’s livelihood. For instance, the mainland can and should import a great deal more US drugs and medical equipment, boost spending on medical care in the urban areas and introduce universal health care in the rural areas for the first time.

In line with its World Trade Organisation commitments, Beijing has already slashed its tariffs on drugs from an average of 19 per cent in 1999 to about 3 to 6 per cent, with some cut to zero.

Beijing can afford to eliminate the rest of the tariffs to import more drugs from American pharmaceutical companies, several of them the world’s largest and best.

Although China already gets most of its imported medical equipment from the US, mainland hospitals still need more hi-tech and advanced medical equipment to deal with so-called rich man’s diseases, such as heart disease, as mainlanders get wealthier. So Beijing can afford to reduce the customs tariffs of between 4 and 8 per cent and a value-added tax of 17 per cent on imported medical equipment.

In addition, as Beijing is to boost spending to improve its energy efficiency and environment, its importing of green technologies should hold big potential. American businessmen could do a better job of selling to the mainland instead of merely waiting for buying missions.

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