U.S. Treasury Secretary Timothy Geithner testifies before a Senate Banking, Housing and Urban Affairs Committee September 16, 2010.KEVIN LAMARQUE/Reuters
The U.S. government's already serious frustration with China's economic policies is growing.
Facing lawmakers at separate committee hearings Thursday, Treasury Secretary Tim Geithner took his hardest line on China's practice of managing its exchange rate since taking office in January, 2009.
Even as the yuan touched a record high against the U.S. dollar, Mr. Geithner told the Senate banking committee and then the House of Representatives ways and means committee that the "pace of appreciation has been too slow and the extent of appreciation too limited."
Mr. Geithner, a senior international official in Bill Clinton's administration who studied Mandarin at Peking University, has suffered more than his share of blows from Congress over the Obama administration's preference to negotiate with China rather than embrace legislative proposals that seek retaliation.
On Thursday, Mr. Geithner signalled that President Barack Obama's preference for negotiation has limits. Rather than simply talking to China, the administration is "examining the important question of what mix of tools, those available to the United States and multilateral approaches, might help encourage Chinese authorities to move more quickly."
With the unemployment rate at 9.6 per cent, and mid-term congressional elections less than two months away, China is under fire for everything from its managed exchange rate, to its tendency to favour domestic companies over international ones to the country's weak intellectual property laws.
The House is considering a bill that would allow companies to seek duties on Chinese imports in retaliation for unfair trade practices, while senators are threatening legislation that would apply duties on Chinese goods that would eliminate what they judge to be China's currency advantage.
"China does whatever it wants while we grow weaker and they grow stronger," said Christopher Dodd, the Democratic chairman of the Senate banking committee. "We need new tools."
Missing was any hint of what those new tools might be.
Legislators have threatened retaliatory measures against China for years. On Thursday, several lawmakers, including Mr. Dodd, suggested they favoured passing punitive legislation not to start a trade war, but to strengthen Mr. Geithner's negotiating position. Chances are that China would see through that.
"A lot of this will be seen as grandstanding in China," said Gregory Chin, a senior fellow at the Waterloo, Ont.-based Centre for International Governance Innovation and a former Canadian diplomat in Beijing. "The view in China is to get past this next political cycle."
The yuan climbed 0.26 per cent to close at about 6.72 per dollar in Shanghai on Thursday, its biggest advance since June 21, according to Bloomberg News. The Chinese currency has climbed about 1.5 per cent since the Chinese government said it would allow its currency to appreciate, ending a two-year freeze that President Hu Jintao implemented to help the country's exporters get through the financial crisis.
China's move was hailed at the time as a victory for Mr. Geithner's strategy to turn down the volume over the yuan by shifting the debate into international arenas such as meetings of the Group of 20. The idea was to persuade China that its rigid currency policy was holding back its domestic economy, and by extension threatening the recovery because spending by Chinese consumers is vital to make up for demand that has vanished in the U.S. and other advanced economies.
"Enhanced currency flexibility is not a slogan, it is a reality, and for sustainable rebalancing we will have to see greater flexibility in all major currencies, including the [yuan] which we have not yet seen," Bank of Canada Governor Mark Carney told The Globe and Mail's editorial board on Thursday.
Geithner suggested during his testimony that the forthrightness of the kind demonstrated by Mr. Carney has been all too rare, saying many U.S. allies have been content to "draft in our wake" when it comes to putting pressure on China. He said he would continue to try to make the debate over China's exchange rate and trade policies an international one, but beyond that he offered few clues about what he would next try to bring an end to the currency spat.
Andy Busch, global currency and public policy strategist at Bank of Montreal's investment arm in Chicago, said U.S. politicians are spending too much time focusing on the currency and should instead try to compete with China's lower tax rates. Mr. Chin questioned the ultimate effectivenessof a multilateral approach to China, saying eventually the dispute must be settled in serious bilateral negotiations where both sides are willing to make concessions.
"I have never really heard from the U.S. what they are willing to give up in exchange for a higher exchange rate," Mr. Chin said.