Posted by: Frederik Balfour on September 22, 2009
Chinese President Hu Jintao can afford to take the moral high ground on protectionism when he sits down with President Barack Obama on the sidelines of the U.N. General Assembly in New York today. Instead of responding with a tit-for-tat action immediately to Obama’s decision last week to slap 35% tariffs on imported Chinese-made tires, Beijing merely launched an “investigation” of possible trade violations over chickens and auto parts with the W.T.O. While some media predicted things could escalate into a full blown trade war, I noted in this is an unlikely prospect.
Others have speculated that Obama was only throwing a bone to protectionist law makers in Washington in order to gain some traction to push through his wishes on more pressing issues such as global warming and climate change, a major item on the agenda of the G-20 summit in Pittsburgh later this week.
There is a third possibility. Rather than try to hit back at the U.S. on the trade front, Beijing could conceivably threaten to slow or even stop its purchase of U.S. treasuries. China has expressed concern over the vulnerability of its monster hoard of U.S. treasuries to continuing weakness in the dollar and has hinted its desire to diversify its holdings of international reserves into other currencies. Washington well understands the gravity of this possibility, one reason, no doubt that it has eased off somewhat on charges that Beijing is manipulating its currency. What’s more, even if China were to allow the yuan to appreciate, unless the U.S. starts consuming less and saving more, its trade deficit would merely shift from China to some other higher cost manufacturer, imposing an implicit tax on the U.S. consumer.
Earlier today, Asian Development Bank chief economist Jong-Wha Lee told me that China and the U.S. should put minor trade spats aside and focus on finding ways to re-balance their economies. The Chinese need to learn to spend more to help reduce their trade surplus, and the Americans need to learn how to save. “Domestic politics is important, but [a country’s] legitimacy comes from playing right as a global leader,” he said. “The two major players should work together to solve the global imbalance.”