Currency Manipulation and Clean-Tech Subsidies

By Daniel Chen, BASC Research Assistant

Over the past month, trade disputes have created heightened political tension between the world’s two largest economies. In October, the Senate took action against the China’s undervaluing of the renminbi, arguing that it unfairly supports Chinese production at the cost of American manufacturing. Now, the Commerce Department is investigating allegations that Chinese “dumping” of solar panels is pushing American producers out of business.

Over the summer, Solyndra, a company that made solar panels and received more than five hundred million dollars in federal loan guarantees, collapsed, making the issue particularly salient in America. Not only that, but China’s continued economic success amid slow growth in the United States has led to resentment and anger among many unemployed Americans. The perception that China has been unfairly subsidizing its exports through currency manipulation will be a particularly powerful issue as elections near.

For many people, the overarching question involves how these issues will affect Sino-American trade relations. On the one hand, the Senate bill regarding currency manipulation is misplaced and nonsensical. Even if China revalued its currency, why would manufacturing jobs return to America instead of Vietnam or Bangladesh? In addition, a revaluing of the renminbi is actually a necessity to sustain China’s remarkable economic growth. As The New York Times reported, a weak renminbi actually hurts Chinese domestic consumers. As China’s consumer spending is only about thirty-five percent of its GDP, its domestic market remains a largely untapped resource that can help fuel future growth. Instead of pushing draconian bills that have no hope of passage, American leaders should be seeking more constructive ways to partner with China to ensure continued economic cooperation.
On the other hand, the solar industry may be different. Under WTO rules, many Chinese subsidies, especially if they target exports, could be illegal. The growing market power of Chinese solar companies also raises the political stakes of inaction, which could realistically lead to U.S. lawsuits under the WTO. This could possibly lead to a harsh Chinese response, perhaps raising the possibilities for a trade war. Yet if American companies are facing unfair competitive pressures, what choice do they really have?

The next few months have huge implications for the future trajectory of Sino-American trade relations. While the Senate bill may make little sense, the allegations of Chinese dumping are far more serious. Will seeking action under WTO rules facilitate fairer Chinese trade practices or will it precipitate larger economic disputes? The Commerce Department and American officials must conduct an extensive cost-benefit calculus, weigh every possible option, and remember that with the possibility of trade retaliation and its commensurate implications, we must tread with the utmost caution.

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