Are Our China Policies Doomed To Failure?

The Financial Times reports that the U.S. Treasury is turning up the heat on the renminbi:

The US Treasury has told the Chinese authorities that they must revalue their currency by at least 10 per cent against the dollar to prevent protectionist legislation in the US congress.

Henry Kissinger, former US secretary of state, is one of a number of unofficial envoys who have impressed upon China the urgent need for action on the 10 per cent target, and on the seriousness of the threat from Congress, people with familiar with the administration's efforts said.

As well as the minimum 10 per cent target revaluation, Dr Kissinger was briefed by the Treasury on the need for other measures, such as a shift to a currency band against the dollar or a basket against a number of currencies to replace the peg...

The administration has been spurred by concern over a bill championed by Charles Schumer, Democratic senator, that would impose trade sanctions if China does not act within six months.

When John Snow, Treasury secretary, released the department's report on trade and exchange rates last week, he said that the Treasury had called for currency flexibility and that an interim step was needed.

But will it work?

Many experts on China say that the increased pressure from the United States may make it harder for the Chinese authorities to take action, and in particular for those who favour a shift in the currency regime to win the argument in Beijing.

Tax Policy Blog comments on other recent attempts to force China to do the bidding of U.S. interests:

Now, in response to threats from the Bush administration to re-impose import quotas the Chinese have raised their own import taxes...

Not surprisingly, domestic manufacturers in the U.S. cheered the news. But should we fear cheap imports from China? In Adam Smith’s Wealth of Nations he rails against high import taxes, as they simply reward the anticompetitive rent seeking of domestic companies...

But alas, even in Adam Smith’s day the problem of concentrated benefits and diffuse costs meant the special interest of domestic producers usually wins over the interest of consumers.

Classic rent-seeking to be sure, but this observation from a siliconindia.com article (via China Digital Times, via Simon World) suggests U.S. producers are not the likely beneficiaries of our "successful" campaigns, through tariff and exchange rate policies, to make Chinese exports more expensive:

When the going gets tough, the Chinese simply cross the Wall. Faced with a higher tax on exports following pressure from the U.S. and the European Union, large Chinese textile suppliers to Wal-Mart are relocating their manufacturing base to India..

The Chinese are not the only ones packing their bags. Wal-Mart suppliers in Singapore and the Middle East have also shown interest to shift production to India. The removal of quotas seems to be helping India’s case.

China is already under pressure from the U.S. to revalue its currency, which has been artificially kept low against the dollar. It also faces demands from the EU and the U.S. to curb its surging textile exports. Beijing has reacted to it by hiking the tax on exports. If the Yuan is revalued, the combined effect of the changes will make Chinese goods costlier, the paper said.

A tangled web indeed.