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US dabbles in trade protectionism, China wallows

By Derek Scissors - posted Thursday, 17 December 2009


This decade's crisis is different than last decade's. This one is global and the previous one was regional, but that mainly has the effect of adding the EU to the group of countries now hurt by the yuan peg. The more important change is in China itself: this decade's China is different from last decade's. The PRC has become too big an economic power to be tied so tightly to the dollar.

At the end of 1997, China was the world's seventh-largest economy, with a share of global GDP of a bit over 3 per cent. As the end of 2009 approaches, China will soon pass Japan to become the world's second-largest economy, and its GDP share is closing on 7.5 per cent. In 1998, the PRC's share of world trade was a bit under 3 per cent. In 2009, it is over 8 per cent and China is the world's second-largest exporter.

When one of the 10 most important economies and trading states pegged its currency to the leader, it distorted the global economy. With China now the world's second-most important economy, these distortions have become fundamental. The hope that the PRC might lift East Asia out of recession has given way to complaints about unfair currency competition. The EU is seeing its trade relationship with China warped by a cheap currency. The peg prevents a falling dollar from helping adjust Sino-American trade. China's trade partners have very good reason to be critical.

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A helpful nudge

The best way forward is not so easy to discern. It is tempting to decide that a protectionist counter-threat is the only means of moving the PRC towards more open trade. Yet American protectionism could push a teetering system disastrously toward trade blocs, the last instance of which preceded World War II.

One step that should be taken is for President Obama to clear the air. It is long past time for the President to present a comprehensive view on trade. Such a presentation would offer the opportunity to explain American anti-dumping and countervailing duties and point out that Chinese trade intervention is two orders of magnitude more extensive and seemingly permanent.

This will at least curb harmful rhetoric coming out of Beijing and perhaps help generate the necessary political will there. The PRC's success in expanding its economy and trade means holding fast to currency policy now clashes with the party's core principles of control and stability. The world's second largest economic power cannot stay hidden behind the largest for long - the yuan peg must eventually break.

The question is whether it will be done by the PRC in relatively smooth fashion or whether it will occur in a crisis setting, with Beijing's hand forced by foreign action. It would be better for all concerned if China started the process itself, and soon. President Obama should do all he can to convince the Chinese to take the initiative. At the least, he should not allow the PRC to continue to masquerade as aggrieved free traders.

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First published by The Heritage Foundation on December 3, 2009.



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About the Author

Derek Scissors, PhD, is Research Fellow in Asia Economic Policy in the Asian Studies Center at The Heritage Foundation in the United States.

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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