W ill Western governments press their advantage to force a change in Beijing policy?

Occasionally, but not nearly often enough, a dispute bursts out into the open that helps give meaning to the protests that by now predictably accompany every gathering of world leaders – protests that are no doubt something to brace for when the G20 descends on Toronto in June.

Although media attention has been focused of late on China and Google Inc., the bigger issue is China's craven manipulation of its currency for the past decade or so, in order to make its exports more competitive in Canadian and other global markets. This is a patently unfair trading advantage that has caused widespread job loss across North America and, in effect, finds China stealing jobs even from its Pacific Rim neighbours. Beijing's deliberate suppression of the yuan, a.k.a. the renminbi, at a level far lower than its true value if allowed to "float" the way the loonie and other major world currencies do, has played no small role in the "hollowing out" of North America's manufacturing base.

Some Americans in high places finally are saying enough is enough. For a decade, Western world capitals have gently prevailed on the regime in Beijing to cease and desist in its manipulation of its currency.

But as recently as March 14, Chinese Premier Wen Jiabao made the absurd declaration that "I don't think the renminbi is undervalued. We oppose countries pointing fingers at each other and even forcing a country to appreciate its currency."

Putting aside Beijing's ritual efforts to force other heads of state not to extend hospitality to the Dalai Lama, Wen's outburst is a clear signal that further diplomatic entreaties will have no effect in changing a "Chinese currency policy (that) is adding materially to the world's economic problems at a time when those problems are already very severe," says U.S. economist Paul Krugman, who won his 2008 Nobel Prize for his work in trade policy.

The dynamic Chinese economy is long past the point of needing the economic crutch of a currency whose government-manipulated low value does not begin to reflect China's now awesome export prowess. The International Monetary Fund estimates that China will close the year with a trade surplus of $450 billion (U.S.) – about 10 times' the size of China's surplus just seven years ago.

That is, says Krugman, "the most distortionary exchange rate policy any major nation has ever followed." At least five U.S. senators agree, in one of Washington's few bipartisan efforts in recent times. Spearheaded by New York Democrat Charles Schumer and South Carolina Republican Lindsey Graham, the five senators earlier this month introduced legislation to enable the U.S. to more easily identify currency manipulation and take retaliatory action.

Where the protesters come in is that Big Business stands four-square against rattling China's cage. "We're lashing out at China rather than tending to our own business," says Stephen Roach, Asia chairman of New York investment bank Morgan Stanley, whose clients include Beijing, Chinese companies and Western firms doing business in China.

Companies as varied as Canada's Bombardier Inc. and BlackBerry inventor Research In Motion Ltd.; along with General Motors Co., which does its most profitable business worldwide in China; and General Electric Co., eager to tap a huge Chinese market for its power-plant turbines, would much prefer that victims of Chinese currency manipulation continue their vain practice of issuing subtle complaints rather than dropping the gloves.

But that's an approach that favours a few blue-chip multinationals and works powerfully against working people outside of China. As a remedy, Krugman suggests a 25 per cent or so surcharge on Chinese imports. He cites the 1971 precedent in which the U.S. applied a 10 per cent surcharge on goods from Germany, Japan and other nations with undervalued currencies. Those surcharges were removed just a few months later after those nations with artificially low currencies allowed them to float upward.

There are much tougher sanctions that could be applied to China. Western nations could simply close their markets to the export-driven Chinese economy, making an abrupt end to that nation's industrial revolution. They could end the transfers of Western technology that Beijing insists upon as part of every Western industrial partnership in China.

Naysayers object that the Chinese could dump their massive $889 billion in U.S. currency reserves. But the greenback would plummet in value the moment China began to sell, devaluing the rest of its U.S.-denominated securities. Besides, a cheaper greenback would be an enormous competitive advantage for America.

"Right now America has China over a barrel, not the other way around," Krugman notes.

The question is whether Western governments will seize the initiative to force China to abide by the same rules to which the rest of the global industrial community holds itself. A dynamic Chinese economy is in everyone's interests. One that plunders jobs worldwide and ignites widespread resentment is not.

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dolive@thestar.com

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