Friday, June 11, 2010

U.S.-Sino Trade Frictions Intensify

Chinese trade figures released yesterday showed exports exploding by 48.5% in May over the year before, way ahead of estimates.  China recorded a huge $19.5 billion surplus, which was dramatically higher than the $1.7 billion recorded in April and the slight deficit in March.

Imports rose 48.3%  over the same month last year.  After taking into account calendar adjustments for the number of working days, China said that exports had risen 45.3%  in May from a year earlier and were up 10.9%  from April.

In direct trade with the U.S., China's surplus expanded to $19.31 billion in April from $16.90 billion in March, stoking political pressure on Beijing to accelerate appreciation of the Renminbi.  China has been very reluctant to heed U.S. pressure despite seeming to send signals that it would agree to adjustments in its currency since the beginning of 2010.

Domestically, the Commerce Department said the U.S. deficit in international trade of goods and services increased 0.6% to $40.29 billion from a revised $40.05 billion the month before.  Exports fell by $813 million, while higher oil prices helped to drive imports up by $1.61 billion.

Trade has been one of the few strengths in the U.S. economy during the recent recession, but has now become a drag on the recovery as imports have outpaced exports. The recently ballooning deficit subtracted 0.66% from Gross Domestic Product (GDP) during the first quarter.

The Treasury has been pursuing diplomacy with Beijing to allow the Renminbi to appreciate, but Treasury Secretary Tim Geithner told Congress yesterday that he had no idea when that might happen.  Geithner, confident that a change in Chinese policy was imminent last March, now has signalled that he shared much of Congress's frustration and suggested that China needed to be aware that the U.S. was close to legislation.

Charles Schumer, a senior Democratic senator, vowed to press ahead with legislation to punish China if Beijing did not increase the value of the Renminbi. 

The Renminbi has been pegged to the Dollar for nearly two years but has appreciated nearly 20% against the Euro since last November.  Given the importance of the European market to China,  the Renminbi’s sharp appreciation relative to the Euro provides China with an opportunity to begin the process of allowing its currency to fluctuate within a wider band.

The de-facto rule was that the rate of appreciation would not exceed 6-7%  a year.  As pressure has built over the past two years, market participants have been speculating that the needed adjustment is much larger than a gradual appreciation of 6 to 7%.  Still, Beijing remains adamantly against any major or sudden adjustments and reluctant to embark once again on a gradual appreciation.

In times of extreme financial distress, such as The Great Depression, free trade becomes one of the first casualties.  While it is virtually universally recognized that trade barriers help no one except for the industries protected, they become more politically popular as workers fear that "unfairly" priced imports will cost them their jobs.  China is especially sensitive to the repercussions of high unemployment domestically, which will only get worse if exports suffer.  Thus, a resolution to this issue is neither likely to be immediate nor sufficient to address growing U.S. outrage. 

Marko's Take

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