DEALING WTH EXCHANGE RATE PROTECTIONISM

In this article, I first review protectionist allegations against China, particularly that its currency is undervalued and is being manipulated so that the renminbi (RMB) will not appreciate. Next, I discuss Chi-na’s reasons for not changing its foreign exchange policies for the time being. Finally, I assess the U.S. position on the conditions it faces that have led it to pressure China to change those policies forthwith. In a postscript I mention what China must do before planning an exit from its present exchange rate regime. The Complaint against China Protectionism is expressed in two main forms: the traditional attack on a foreign country’s trading practices, and the more recent attack on a foreign country’s exchange rate policies. Both are a response to a deficit in the balance of trade with a foreign trading partner, but the first form of protectionism may be directed against a deficit in the balance of trade of a particular industry (e.g., steel or textiles). The current prime target of protectionism is China. Previously Japan was the target. Complaints about China’s trade practices allege that it is counterfeiting patented and copyrighted products, granting illegal subsidies on exports of agricultural products, and erecting non-tariff barriers against soybean imports. China in turn has faced re-strictions on its textile exports under the Multi-Fiber Agreement. The Agreement expired at the end of 2004, and the prospect of larger textile exports by China in 2005 is leading textile manufacturers to demand “safeguard ” provisions that importing countries obtained as one of the conditions for admitting China to the WTO. The case for protectionist opposition to China’s exchange rate policy is that it deliberately undervalues its currency to gain a com