3 years

Imbalances

Titanic Clash over the Yuan

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When apocalyptic tones enter economic talk, it’s time to pay attention. The US-China standoff over the yuan’s value (in dollars) is already being spoken of as part of a ‘global war of capital’. Instead of fireballs, picture giant bundles of cash being hurled across borders. Why such an ‘attack’ should scare anyone is a long story, but Beijing’s currency peg (to the dollar)—which perpetuates their trade gap and keeps those bundles flying into America—has Washington DC so furious that it is again threatening to set barriers for Chinese imports. How it all plays out will set the tone for the world’s most important diplomatic relationship. 

For years, the US kept complaining of the yuan’s alleged undervaluation, seen as an unfair way to have Chinese goods selling cheaply in America. Now, the US Senate and Congress are ready to move a Bill that demands a 20 per cent upward revision in the yuan’s value, failing which the US will levy tariffs on Chinese imports to make up the difference. This issue dominated last week’s meeting in New York between Chinese Premier Wen Jiabao and US President Obama.

The Chinese response so far has been to raise the yuan’s value a little. On 16 September, it touched 6.7 to the dollar, its highest level since 1994. This is its second bump-up, the last one being when Beijing relaxed its peg in mid 2005. However, Washington is unimpressed. Any more, says Wen Jiabao, could mean mass unrest caused by job losses in China, since so many of them are dependent on its export sector, which would suffer a jolt from a sudden jump in the yuan’s value (higher price tags on US shopshelves, that means). He also blamed the US-China trade gap on structural reasons more than the currency.

To observers, that sounds like the US will not have its way. “The yuan will rise steadily,” forecasts a Mumbai-based currency analyst, “but because of market rather than US pressure, and that too, by about 3 per cent over the year at most.” 

So, are US tariffs coming? If they do, China might lodge a protest at the World Trade Organisation, maybe even escalate the trade war, or destabilise US finances in worse ways at its disposal. All this is scary for anyone aware of the economic tensions in the final phases of globalisation (which ended in protectionism) that preceded the two World Wars.