Multilateral Approach is the Best Way to Get China to Stop Manipulating its Currency: Viewpoint

Practically everyone outside of China agrees that the Chinese government manipulates its currency, and they agree that China's currency undervaluation hurts other countries' economies. But there's sharp disagreement on how to get China to stop.

Erin Ennis, vice president of the U.S.-China Business Council, firmly believes that the legislation passed Oct. 11 in the Senate is not the way to do it.

Such legislation, Ennis tells IndustryWeek, "shifts the focus away from the Chinese -- where we think there's international agreement that their [currency] intervention is impacting other people's economies and needs to be addressed -- and the attention then shifts to the United States and how we are playing fast and loose with our WTO commitments in order to get back at another country."

If the currency legislation ever becomes a law -- a longshot at this point -- the first thing that likely would happen is China would sue the United States through the World Trade Organization, Ennis asserts.

"The bill as passed by the Senate contains provisions that change any dumping and countervailing-duty rules that the U.S. has international agreements with the WTO on," Ennis explains. "Those agreements stipulate how you do the calculations for determining whether something is dumped and how much you can put a duty on and what constitutes whether something is a subsidy that you can put a duty on to counteract as well.

"What the bill does is it redefines what those terms are, and as much as it would be very convenient if [the United States] could get everyone to agree with an immediate reinterpretation of WTO rules, those things are done through negotiation, not through an individual country's interpretation," Ennis says. "At a minimum, China would have a very strong case to take us to the WTO on these issues."

There's some consensus in the legal community that China would win, Ennis says.

When a country loses a WTO case, Ennis explains, one of two things happens: The losing country can change its own laws, or the victorious country can hit the other country with tariffs to compensate for trade lost as a result of the infraction.

"Either way we lose," Ennis says. "Because we are in a situation where an effort that we have made to try to theoretically get at China's currency undervaluation through tariffs would then result in tariffs actually being put on U.S. goods and services rather than the other way around."

The Jobs Myth

Ennis also takes issue with the assertion that the currency legislation would bring manufacturing jobs back to U.S. soil. She calls that "a poorly placed assumption given how the U.S. economy works and the nature of what we import from China."

"We tend to import low-end consumer goods that we haven't made here for years," Ennis says.

The U.S.-China Business Council, a nonprofit organization of 240 American companies that do business with China, often uses televisions as an example of the jobs myth.

"Ten years ago, your television was probably made in Japan. Today it's made in China," Ennis explains. "If it's not going to be made in China, it's still not going to come back to the U.S. for production. It's probably going to go to Malaysia or Vietnam or someplace else."

Her point: Legislation designed to fight back against China's currency undervaluation might create a few jobs, "but it's certainly not going to address the unemployment problems that we have, and it's certainly not going to reverse the decades-long decline in manufacturing in this country."

"Because it's not due to the value of China's currency," she tells IndustryWeek. "It's due to the fact that our economy has transitioned.

"We have highly efficient manufacturing. More people have probably lost jobs based on innovation and higher productivity levels than based on [China], just because of the nature of the kind of manufacturing that we do.

"We still put out more than anybody else in the world at this point. That's a pretty good indication that manufacturing jobs are on the decline, but not manufacturing output. So we're still making as much -- we just make it with fewer people."

A Multilateral Approach

While Ennis believes the Senate's currency legislation would "do more harm than good," she says there are other ways to push China to appreciate its currency.

"What has proven to be successful in dealing with the Chinese in our experience is using multilateral approaches," she says.

As an example, Ennis cites China's infamous "indigenous innovation" policy, which gives preferential treatment in government procurement to products patented and trademarked in China. The national, provincial and local governments in China procure huge amounts of goods from foreign companies, Ennis notes, making the implications of this policy particularly grave.

To fight back, the U.S. government and business community joined forces with the governments and business communities of the European Union, Japan, Korea, India and Canada to put "global pressure on China that the rules were No. 1 not the right way to go and No. 2 something that they needed to retract immediately."

What happened?

"We saw over the course of the past two years retractions in those policies," Ennis says.

She admits that it's been "a slow and tedious process" to get China's government entities to retract the indigenous innovation policy. But it's been effective.

"And if our ultimate goal here is genuinely to get China to move to a market-influenced exchange rate -- which is where all of us seem to agree that we want China to go, so that the market determines rather than the government determines what the value is -- working with other like minded countries -- who I think there are many of these days, given statements that have come out of Brazil and Australia in particular -- I think we would find that there's an international community interested in working with us on this."