Friday, January 21, 2011

President Hu’s State Visit to the U.S. Continues Economic Gamesmanship


China’s President Hu Jintao began his state visit to the U.S. on Tuesday. A state visit is typically granted only to countries of high strategic importance and the current visit is considered a symbol of the significance of the U.S.-China relationship. Three economic issues are expected to dominate discussions during the visit: China’s currency valuation, trade access for U.S. businesses, and China’s concern with U.S. monetary policy.

During the state visit, China committed to a total of $45 billion in new contracts for U.S. companies to export goods to China. Despite the commitment, the U.S. argues that China's exchange rate is pegged at such a low level that it gives China's exporters an unfair cost advantage and discourages Chinese consumers from purchasing imported goods. China counterargues that exchange rate policy is a matter of sovereignty and that U.S. policy has been inconsistent because it ignores other countries with similar exchange rate policies. China’s currency has resumed its gradual appreciation in recent weeks, but it remains to be seen whether the rate of appreciation will accelerate following this week’s visit.

U.S. companies complain that China’s policymakers hinder market access to foreign manufacturing, agriculture, and high-tech goods. The U.S. believes that China’s subsidies to domestic companies and technology-transfer requirements are unfair and that China’s intellectual-property practices cost U.S. businesses billions of dollars in lost sales of software and media. The U.S. hopes President Hu’s visit will lead to the removal of some of these barriers and greater collaboration on clean energy projects.

China has pushed back against some of the U.S.'s criticisms with points of its own. China is the largest holder of U.S. treasuries and Premier Wen Jiabao has repeatedly expressed his concern with the Federal Reserve’s quantitative-easing policy, known in short as QE2. Under the policy, the Federal Reserve buys U.S. Treasuries which, in turn, increases the quantity of U.S. dollars in circulation, reducing the value of the dollar. Because China holds an estimated $900 billion in U.S. Treasuries, China is concerned that its Treasuries will be repaid with dollars that are less valuable than it anticipated.

Discussion Questions:
1. One year from now, will China have adopted a market-based exchange rate system?
2. What is currency manipulation? Isn’t a fixed exchange rate or a peg by definition currency manipulation?
3. How have other countries reacted to the Federal Reserve’s QE2 policy?

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