Recent actions by the U.S. House of Representatives and calls from the Obama administration may impact global trading patterns next year. One such resolution — H.R. 2378, the Currency Reform for Fair Trade Act passed in early October 2010 — allows the United States to peg import tariffs directly to what is determined to be the true value of a foreign currency. The United States could then use its own estimates of artificial currency undervaluation to set tariffs and import duties on products from countries that use cheap currency as a tool to dominate global trade.
Treasury Secretary Tim Geithner supports this legislation. At a recent International Monetary Fund (IMF) meeting, he called for the IMF to take a strong stance against countries keeping their currency cheap to gain global trade advantages. Many industrialized nations back this position. While neither the IMF nor the U.S. Congress has codified this stance, the action is a direct challenge to trading partners who artificially keep their currency value low. Who is this challenge directed at?
Ah, that would be China, as made clear by global financier George Soros, who spoke out in support of these actions in a BBC interview in early October 2010. “Whether it realizes it or not, China has emerged as a leader of the world,” Soros said. “If it fails to live up to the responsibilities of leadership, the global currency system is liable to break down and take the global economy with it.” Pointing to China’s incredible $2.5 trillion trade surplus, Soros warned of a currency war: “The Chinese control not only their own currency, but the entire global currency system.”
These currency tensions impact labor costs, too. Some countries use low-cost labor to compete for global trade. In Thailand, for example, the baht increased its value 10 percent this year, causing labor costs to rise as well. Not good when competing with countries undervaluing their currencies.
As you might expect, the Chinese expressed strong opposition to the move by Congress, the IMF, and the positions of Geithner and Soros. “Carrying out anti-subsidy investigations on the basis of currency is against the rules of the World Trade Organization (WTO),” said Commerce Ministry spokesman Yao Jian. Chinese officials have already committed to a gradual rise in the yuan, but say it will take time to adjust to prevent internal economic disruptions. They also cite loose U.S. economic policies, immense deficit spending, and low productivity, which are fundamental to weakening the dollar against the yuan. The Chinese are taking their case to the WTO, but there are also quiet hints of retaliation against U.S. products.
As it plays out after the election and during 2011, this issue will impact global product flow. Keep your eye on this important development.