Treasury Secretary Tim Geithner had some of the administration's strongest words yet on China's currency policy in front of the Senate this morning. China has been artificially lowering the value of the Renminbi, thus making its exports more competitive (especially vis-à-vis the United States), in part by purchasing a lot of American debt. The administration had hoped that an agreement made earlier this year would allow the Renminbi to appreciate, but thus far appreciation has been limited at best.
Now, Geithner says that the appreciation has been "too slow" and that the administration is "very concerned about the negative impact of these policies on our economic interests, and are pursuing a carefully designed, targeted approach to address these problems," which includes bringing new cases before the World Trade Organization and pushing at international summits, along with other countries, for China to revise their currency policy.
Congress, though, is more impatient, and is debating action, including laws to impose retaliatory tariffs on Chinese exports to counteract the currency subsidy. While the administration agrees in principle with Congress, it hopes to manage the resistance more delicately, since China's cooperation is important on a broad portfolio of international issues. There is some suggestion that the good cop, bad cop approach is working: Renminbi appreciation accelerated in anticipation of these hearings, suggesting that China is getting the message. However, if that trend doesn't continue, and the administration cannot reassure Congress that it is doing all it can to deal with the issue, the ugly possibility of a trade war lurks on the horizon.
-- Tim Fernholz
