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Analysis: Romney is likely to break "day-one" China currency pledge

Republican presidential nominee Mitt Romney speaks at a campaign rally at the airport in Columbus, Ohio November 5, 2012. REUTERS/Brian Snyd
Republican presidential nominee Mitt Romney speaks at a campaign rally at the airport in Columbus, Ohio November 5, 2012. REUTERS/Brian Snyd

By Nick Edwards

BEIJING (Reuters) - Presidential candidate Mitt Romney would lack the legal power to label China a currency manipulator on his first day in office should he win Tuesday's election, offering him a way out of what experts say is the weakest claim on the issue for years.

The authority to make the formal accusation lies with the U.S. Treasury Secretary, which could be a face-saving remedy former U.S. officials say Romney might need after he repeatedly said he would declare China a currency manipulator, as part of his campaign to suggest President Barack Obama had been soft on the country.

A public slap at Beijing on his first day in the White House in January could carry serious consequences for both countries and the global economy, putting at risk bilateral trade between the world's two biggest trading nations - valued in Chinese customs figures at some $540 billion in 2011.

It would almost certainly compel the new leadership in China, also set to be unveiled this month, to respond in some fashion, escalating the risk of a trade war with the world's second-largest economy - one Romney would likely have to fight without the support of the IMF or WTO and with the most recent economic evidence stacked against him.

"Romney has painted himself into a bit of a corner on the currency issue," said David Loevinger, emerging markets managing director at Los Angeles fund firm TCW, which he joined in June from the Treasury where he was senior co-ordinator for China affairs and the U.S.-China Strategic and Economic Dialogue.

"If you look at the law it is not the President that has that authority, it's the Treasury Secretary. And on day one he is not going to have a Senate-confirmed Treasury Secretary," Loevinger told Reuters.

That could be just as well.

A Romney White House would be applying the label to China as trade imbalances are shrinking, the dollar is falling and the yuan is rising - while trying to repay political capital to major corporate donors, many of which have substantial business interests in China and would be unlikely to want to rock Beijing's boat too much.

"Over the last decade, this seems like the oddest moment to pick a fight with China as a currency manipulator," Loevinger said.

Even more so, China's yuan has rallied 17 percent against the dollar in nominal terms during the last five years and the country's trade surplus as a proportion of GDP has shrunk some 75 percent. Foreign exchange reserves have remained largely static for 18 months, implying no major central bank intervention in the currency.

It's not the kind of evidence likely to win an argument at the World Trade Organisation (WTO) - the key global body with power to impose penalties in international trade disputes, but which experts say has never ruled on a currency case.

"The WTO agreement nowhere, even under the subsidy and countervailing measures agreement, says anything about currency manipulation," Spencer Griffith, a partner in Washington with U.S. law firm Akin Gump Strauss Hauer & Feld, who has practiced international trade law for more than 20 years, said.

"You could go to a WTO panel and try to argue that currency manipulation violates China's WTO obligations. My bet is that the United States would lose that case," Griffith, who has served as managing partner in the firm's Beijing office, added.

TRADE ROW RISKS

That suggests a Romney White House would instead try to levy duties on China under domestic trade law, a process that could take the Commerce Department a year and likely prompt Beijing to file a complaint with the WTO that such duties are invalid under WTO rules - a case Griffith reckons Beijing is likely to win.

It could drag out a row for years, putting two-way trade at risk, especially as the new leadership of China's Communist Party - set to be unveiled at a congress starting later this week in a once-a-decade transfer of power - would likely want to demonstrate it is no pushover.

U.S. firms operating in China already complain about unfair competition, discrimination and barriers to domestic market entry. That would be made worse if Romney kicked off a protracted trade dispute.

"I do not underestimate at all the political and economic backlash that Romney labeling China a currency manipulator would create," said the head of one U.S. business in China, who spoke on condition of anonymity.

The International Monetary Fund (IMF) is even less likely to be interested in claims of currency malfeasance than the WTO, as it has no obligation to respond to such complaints.

In addition, the IMF's assessment of the relative value of China's yuan, also known as the renminbi, shifted significantly in a landmark report in July in which it concluded the currency was "moderately undervalued", softening its previous view that the yuan was "substantially undervalued".

As a medium-term analysis of the currency's dynamics, the implication is that the language may not shift again for several years - especially given the IMF's relatively stable projections for China's current account surplus out to 2017.

But worse than being isolated internationally for Romney would be being seen to be out of step with his business backers and other leading Republicans - including the party's last president, George W. Bush.

Bush, along with Republican governors Scott Walker of Wisconsin, Rick Perry of Texas and Rick Scott of Florida were all participants in September's U.S.-China Investment Week to promote the United States as a natural home for billions of dollars of Chinese foreign direct investment (FDI) to create American jobs.

Jay Riskind, managing director of global projects at Beijing-based private equity firm, PiYi Investment, which helped organize the event, says concerted efforts in U.S. states and cities to secure Chinese investment provide the perfect counterpoint to campaign trail rhetoric.

"What we've seen from (individual) states is really more important than what we've heard from the campaign," Riskind said. "We have seen over and over again that states are very eager to facilitate direct investment promotion efforts."

WIGGLE ROOM

Wiggle room may be what Romney needs. Indeed, his plan to issue a Presidential order on his first day in office could create that room if he merely directs the U.S. Treasury to list China as a currency manipulator in its bi-annual report - effectively delaying action until its April 15 scheduled release.

His campaign literature says the Treasury will use the designation if China fails to bring its currency to fair value. Some academics argue the yuan is close to that point already, based a steady level of foreign exchange reserves, recent capital outflows and its current account balance relative to GDP.

One of Romney's main economic advisers and a top candidate for Treasury Secretary, Glenn Hubbard - a former senior Treasury official and chairman of the President's Council of Economic Advisers from 2001 to 2003 - has said he does not expect the United States and China to get into a trade war.

There's plenty at stake with analysts estimating China could spend $2 trillion globally on FDI in the next 10 years, a salivating proposition for many of the world's top economies struggling for growth and employment opportunities.

Research in September from consultancy Rhodium Group analyzed 600 Chinese direct investment transactions in the United States between 2000 and 2012 and concluded that U.S. subsidiaries of Chinese majority owned firms directly supported 27,000 jobs.

Assuming a steady investment trend, Rhodium reckons that number would jump to 200,000-400,000 by 2020.

Meanwhile surveys of U.S. businesses by the likes of the U.S.-China Business Council or the American Chamber of Commerce in China do not rate the value of the yuan particularly high on the list of corporate concerns. Fresh disruption to market access and other corporate complaints are bigger fears.

U.S. executives worried about a business backlash to a diplomatic row have a live example playing out before them in the shape of a festering territorial dispute between China and Japan, that flared in anti-Japanese violence in September.

Boycotts of Japanese goods by Chinese buyers has seen some firms, especially car makers, report sales sinking up to 40 percent in the aftermath of the most recent flare-up.

Kenneth Jarrett, Greater China Chairman of consulting firm APCO Worldwide and a former U.S. diplomat, most recently as consul general in Shanghai, says the currency manipulator label is not a China-Japan moment, but it would be damaging should a Romney administration apply it.

"It could be corrosive to the bilateral relationship. That's what I would see as the biggest danger," Jarrett said.

"The benefit of declaring the intent to (apply the label) at this stage is quite different to the benefit of doing so when you are sitting in the Oval Office," he said. "I'm not convinced he would do it when push came to shove."

(This story was corrected to clarify Griffith's role in paragraphs 12 and 13)

(Reporting by Nick Edwards; additional reporting by Rachelle Younglai in WASHINGTON:; Editing by Neil Fullick)

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