“We want to sell you all kinds of stuff,” President Barack Obama told his Chinese counterpart during a rare joint press conference at the White House today. Trade relations between China and the United States are anything but free however.
The United States export some $100 billion worth of goods and services to China, making the country America’s third largest trading partner. China sells nearly three times as much to the United States.
As China’s economy continues to expand at almost 10 percent a year and consumption increases, American exports to China are growing at twice the pace of exports to the rest of the world.
China has gradually been opening its market to international trade but significant bans and restrictions remain in the form of tariffs, subsidies and red tape. Foreign investment is especially restrained although new rules adopted in 2009 explicitly allow foreigners to participate in partnerships. Poor property rights protection is a major impediment to foreign direct investment however. Copyrights, patents and trademarks are routinely stolen.
America restricts free trade as well, if to a lesser degree. Sales of high technology and weapons are curtailed, forcing China to do business in Europe and with Russia. The Chinese prohibit foreign investment in particular industries and so do the United States, channeling Chinese money into a limited number of sectors of the American economy.
One factor that tilts the balance in China’s favor is its undervalued currency which, according to the Obama Administration, keeps Chinese exports artificially underpriced at the expense of their American competitors. American officials have repeatedly urged the Chinese to appreciate the yuan. President Obama today professed that the renminbi remains “undervalued” and should be “increasingly driven by the market.”
Yet the Chinese currency appreciated by more than 20 percent between 2005 and 2008 when China relaxed its hard peg with the United States dollar. In the wake of the global financial meltdown, China reinstated the peg but it has allowed the yuan to gain in value by another 3 percent since last summer.
Another element that affects the yuan‘s real value is China’s extremely high inflation rate. Treasury Secretary Timothy Geithner admitted last week that as a result, in real terms, exchange rates are appreciating “at roughly a pace of about 10 percent a year.” That, he added, is “a very substantial material change.”
It is. The Wall Street Journal calculated that since 2005, the real value of the renminbi has appreciated by 50 percent! Adjusted for inflation, a 100 Chinese yuan could be exchanged for about $12 dollar in 2005. Today, they would buy $18.