Geithner Will Not Make A Yuan Decision On His Own

Treasury Secretary Tim Geithner made a weak defense for why the Administration had not named China as a “currency manipulator” when he testified before the House of Representatives Ways and Means Committee last April. He must have been aware of the hearings the day before in which some members of Congress became surly about why China was allowed to tip the balance of trade in its direction by keeping the value of the yuan artificially low.

Geithner’s best explanation was that “This process of adjustment in their exchange rate is going to have to happen over time. We are using every approach we can find.”

“Everything” is relative. Geithner and the President do not want to damage the US relationship with China. They also understand the Congress may take the decision of how to negotiate with the People’s Republic out of their hands. The House and Senate could pass bills to sanction the Chinese. They may even be able to override a Presidential veto.

The risk, and it is real, is that if the US decides to put tariffs on Chinese goods, or block them altogether, then the Chinese will close their markets to US products. This could harm America in two ways. The first is the flow of inexpensive products that can be sold at deep discount prices as retailers such as Walmart (NYSE: WMT) might disappear. This could raise the cost of living for some citizens, and might touch off a round of inflation. The other edge of the sword is that China could close down all the Walmart stores on the mainland and undercut the big retailer’s important profit source.

Despite these threats, the Chinese have barely moved in terms of adjusting their currency. The US, China must assume, is a toothless tiger that is unable to threaten the world’s most populous nation.

Geithner’s solution is that he will take up the currency matter with the G20. China is a member of that group. So are Russia, India, and Indonesia. Favorable labor costs and perhaps currency ratios may favor the expansion of exports from those countries to the US.  France, Germany, Italy, the UK, and Australia are also members. They face the same unfair Chinese trade policies as the U.S.

The G20 is not known for making hard decisions. It is a consensus-building body that rarely wants to take an aggressive stance on the problems of one of its members.  Geithner, therefore, has bought himself time, but has not advanced the chance one iota that the yuan problem will be solved. Congress may do that for him.

Douglas A. McIntyre