I MUST not have made myself very clear in my earlier post on China policy, as my colleague at Free Exchange says he doesn't understand what I was saying. So let me try to make it clearer: I don't buy the argument that China is hamstrung in its ability to make trade or currency policy by its citizens' nationalism. Its citizens' interests are a different matter.

The argument that retaliatory actions against another country are futile because they will only anger that country's nationalist constituents is an argument with roots in fields like human rights and nuclear non-proliferation. In those contexts it's a very strong argument. In fields like human rights, freedom of expression and rule of law, or on issues like Tibet, there is virtually nothing outsiders can do that will affect internal Chinese policy, and while America cannot be seen to condone gross abuses, taking aggressive stances is generally unproductive. The perception by both leaders and the general public is that outsiders have no business interfering in these issues. 

Trade disputes are different. They involve credible interests on the part of the importing countries, which the exporting countries must and do take seriously. Ultimately, it's our money. There's no way to pretend that the importing country has "no business" intervening in a trade issue. So trade disputes just don't generate the same kinds of resentment against outside interference as human-rights or security disputes. Yes, the exporting country's public generally sees trade actions as part of a scheme by foreigners to keep them down, but that resentment mostly gets filed away and doesn't much affect government policy decisions. When America or the EU imposes anti-dumping tariffs on Chinese shrimp or shoes, China does not issue diatribes against imperialism or retaliate directly; it takes its case to the WTO. Blanket tariffs on the entire range of Chinese exports would of course be a far more serious matter. However, the case for such tariffs is far more convincing than that for narrow anti-dumping tariffs. The IMF articles of agreement prohibit currency manipulation for the sake of gaining trade advantage, and the IMF believes China to be substantially undervaluing its currency.

I think these points by my colleague are the crux of the disagreement:

If we're willing to attribute sophistication to China's leaders, which we should be, then we should assume that:

- They understand the argument in favour of a stronger RMB

- They understand the impact of China's currency policy on political attitudes in America

- They understand how such attitudes could generate a trade backlash against China

The fact that they're reluctant to revalue given the above should tell us something about the freedom of movement that Beijing has. And respect aside, I'm not sure what pushing aggressively for something China is this reluctant to do is supposed to accomplish.

I'm not sure that China's leaders think that political attitudes in America are likely to lead to a serious trade backlash. Chinese officials know that America is concerned enough to talk about RMB revaluation, year in, year out, but so far experience shows that America is not concerned enough to actually do anything about it. This suggests that we do not really consider it much of a problem, and mostly wish to use the issue as a rhetorical club with which to beat China in the international arena. And that really would be an infuriating way to behave. If America actually considers that an undervalued RMB isn't much of a problem (because it benefits American consumers and American companies with manufacturing operations in China as much as it hurts American manufacturers based domestically), but continues to moan about the undervalued RMB in international forums to excuse its own poor fiscal behaviour and economic performance, then I could see why Chinese leaders would have little patience with that.

But if America thinks the undervalued RMB really is a problem, both because of its effects on American workers, its effects on America's macroeconomic imbalances, and its global contribution to instability; and if America thinks that blanket tariffs on Chinese imports would help correct those imbalances in the absence of revaluation, then absent some other convincing argument against them, America should implement such tariffs and seek agreement with other importing countries on harmonising them. That this will make a nationalist Chinese public angry is not much of an argument against doing so. To get more deeply into the weeds, it's clearly true that with China having re-prioritised growth over stability in the context of the global recession, local government officials and Party cadres are going to be opposed to RMB revaluation or anything else that interferes with their ability to report back high growth figures from their provinces, and forestall embarrassing factory closures and unrest. This is the clearest sense in which Beijing's "freedom of movement" is likely limited. But if you accept that RMB undervaluation is a major problem and is indistinguishable from broad export subsidies, then to say that America should do nothing to respond to it is to say that we should run a trade deficit and put our own manufacturers at a disadvantage to help maintain political stability and the popularity of the government and Communist Party in industrial regions of China. That's where it seems to me that we would be taking responsibility for something that is none of our business. China is responsible for its own internal politics, and is quite capable of handling them.

When I say "absent some other convincing argument against them", I have in mind arguments like "WTO rules do not consider currency manipulation to constitute export subsidies, so American retaliatory tariffs would violate WTO rules." Or "this will set off a cascade of tariffs by various countries on grounds much flimsier than China's currency manipulation." Or "China will retaliate, not just with counter-tariffs against American exports, but with Russian-style legal and administrative attacks on American businesses inside China, including asset seizures and arrests; and the damage will far outweigh any gains from counterbalancing RMB undervaluation." Those are all convincing arguments.