Finance

There has been diplomacy subtle between the US treasury and China over the Chinas exchange rate. The issue has dominated the relationship of the two largest economies that would determine and shape the future of the world economy. US has however received occasional support from Europe and other selected emerging markets. The dispute is that, the Chinese currency policy unbalances the world economy and disadvantages the foreign companies. This has caused the white house to face challenges in the management of its trade and investment relationship with Beijing as it has been evident in the way the American businesses are discontented and fuelled by incidents such as the Google China censorship spat.

US is however frustrated by the fact that it lacks the instruments to conduct the international trade policy in the modern economy. The tools it has are inadequate to cope with the interlocking web that China has used to distort the global trade and investment patterns whereby it uses state-sponsored policies. The US has in the past used old fashioned architecture of the trade policy of a metal bashing economy that is predictable as it focus on the exchange rate on its manufacturers competing head on with Chinese companies in the American market.

Though America has trade defense instruments like the antidumping, countervailing duty and safeguard measures , Chinese imports have not been stopped as evident September last year when one  such tool was used provoking a storm of  protest from free-traders. When China joined the WTO, US and Europe have got to use a lot of efforts to tame Chinas dominance in the global market. However China has experienced growth as it becomes increasigingly interested in locating production locally and selling services like the telecommunications, information Technology and media under the rubric of its indigenous innovation policy. China has successful tamed the influence of US in its economy by claiming that she is modernizing her  economy while it ascend the value of chain and ease way from dependence on foreign companies for investment and technology.

Procurement is used to favor Chinese companies through idiosyncratic technical standards like the homegrown wireless technology which deny licensing to more familiar international standards. This has made the foreign business representatives criticize the policy publicly claiming that they are less and less welcomed in china. The menu of options available to mitigate such problem is limited. The most obvious is the litigation at the WTO.This option is one of the attractive ones that has made Beijing accepts the normal part of trade relations, not a declaration of war. It has drawback from the issue like IPR after it lost a case on the enforcement of IPR.

On the issue of revaluing renminbi that is allowing its currency to increase, China has made a bold step of abandoning its currency peg to the US dollar and adopting a more flexible exchange rate policy. This decision would temporarily cause international criticism as evident at the Canadian G20 summit that almost turned into a bash-China session before Beijing announced that that it was changing the policy. The US administration however notched that this was a victory for behind the scenes diplomacy as there was the risk that the currency dispute that would descend to into a trade war. This dispute had now been solved, the Obama administration claimed

The economic impact of the policy has however been limited as renminbi has only appreciated by 0.3 percent. Chinese officials have ruled out any significant increase in the value of currency given that there is a decline in the current account surplus. However there is some element of politics and Beijing is desperate to avoid  an impression that it is giving into the foreign pressure as well as avoid  a revive criticism by the US that she is gaming the trading system due to a foreseeable slow appreciation of the Chinese yen against the US dollar.