First round fired in battle of China trade imbalance
There were two encouraging developments in recent days in the lopsided trade relationship between the United States and China.
China took a small step toward narrowing the artificial gap that had developed between the Chinese yuan and the U.S. dollar.
China, which had stubbornly refused to waver from its practice of using an artificially low exchange rate, announced that it will now allow the Yuan to float -- within limits -- against a market basket of currencies. Each trading day, the yuan will be allowed to move against the currency basket within a 0.3 percent band on either side of the previous day's closing price.
It will take time
Over time, analysts predict the yuan will slowly appreciate, pushing up the price of Chinese exports and offering relief to companies that have been trying to compete with low-priced Chinese exports.
The more immediate effect will probably not been seen by U.S. manufacturers trying to complete in the American market with cheap Chinese imports. As the yuan increases upward in value, the first beneficiaries are likely to be other Asian and Pacific rim countries that produce textiles, appliances and other goods for the world market.
Eventually, however, a floating currency will remove at least one element of unfairness from the trading relationship between the United States and China. There are still immense barriers to true parity, including China's use of exceedingly cheap child and adult labor, the lack of job safety and environmental protections in the Chinese work place and China's demand that foreign producers move their manufacturing operations to china rather than simply import finished goods into China.
And, of course, there is the issue of intellectual property and piracy, the other area in which progress was made last week.
President Bush named Christian Israel to be coordinator for International Intellectual Property Enforcement at the Department of Commerce.
We're inclined to view Israel's appointment favorably based on the enthusiastic reception given him by U.S. Senator George V. Voinovich of Ohio.
Voinovich has long been a hawk on the question of piracy by China and has called for the administration to take a stronger stand on the issue.
Voinovich said the appointment "demonstrates the administration's dedication to combating international intellectual property theft and to enforcing our trade agreements."
As Voinovich points out, intellectual property is one of the only fields where the United States retains an absolute competitive advantage over other countries.
The biggest threat
The theft of American innovations -- in technology, pharmaceuticals and entertainment products -- is not a problem exclusive to China. But China represents the greatest threat of loss to U.S. patent and copyright holders because of the vastness of the Chinese market and its ability to turn out counterfeit products for world consumption.
Federal Reserve Chairman Alan Greenspan welcomed China's decision to move to a more flexible currency system by calling it "a good start."
That's true, as well, regarding the appointment of Israel as an enforcement coordinator.
Currency markets will determine the effect the floating yuan will have on trade imbalances. Israel has more of an opportunity to determine the success of the battle against intellectual property theft by the degree to which he pursues the pirates.