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Ease WTO rules for China, critic says Print E-mail
Tuesday, 15 December 2009

By Ronald Fink

World trade rules should be eased for China in exchange for an end to its currency manipulation, a respected international economist wrote last Friday.

China’s entry into the World Trade Organization in 2000 forced it to abandon tariffs, subsidies, domestic content requirements and other industrial policy measures designed to support its exports. Instead, Beijing is now widely accused of keeping its currency, the renminbi, pegged to the dollar to keep prices of its exports from rising as the dollar falls.

The U.S. would like to see China end that practice. But even if the U.S. could force Beijing to do so, Dani Rodrik, a professor of political economy at Harvard University, wrote in a column http://www.project-syndicate.org/commentary/rodrik38

published by Project Syndicate that that would not be a good idea.

Rodrik noted that China could let its currency appreciate only “at the risk of inducing a growth slowdown and political and social unrest at home.”

He said that by his calculations, allowing the renminbi to appreciate by 25 percent, the amount by which it is roughly estimated to be under-valued, would reduce GDP growth in China by two percentage points, to under 8 percent.

And he observed that “it is not clear that advocates of this option have fully comprehended its potentially severe adverse consequences.”

Instead, Rodrik argued that China should be allowed to engage in some of the practices that it abandoned after its WTO entry.

If WTO rules were rewritten to give China that leeway, the professor argued, the country would be able to further develop its manufacturing capacity while allowing the renminbi to appreciate, avoiding the huge trade deficit with the U.S. that its currency peg currently produces.

“This way the increased demand for its industrial output would come from domestic rather than foreign consumers,” Rodrik wrote.

He acknowledged that his proposal “is not a pretty solution,” but added that “is the only one.”

The great advantage of industrial policies, he continued, is that they enable growth-promoting structural change without generating trade surpluses. “They are the only way to reconcile China’s continued need for industrialization with the world economy’s requirement of lower current-account imbalances,” Rodrik concluded.

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