Should China Fear Us?

By Simon Johnson
Writing partly in response to “Should We Fear China?“, Robert Salomon of NYU makes some good points – about how rapid appreciation of the renminbi could hurt China and argues:
Although I agree that it is in the best long-term interest of the U.S. and other countries throughout the globe for China to revalue its currency, it isn’t entirely clear to me that such a maneuver is in the near-term interests of China, …or maybe even the global economy.
Robert’s concerns are focused on the effects of a sudden revaluation – a movement in the exchange rate that would be disruptive to Chinese production and plunge that country into recession.  But that scenario hardly seems likely.
Even if the US decides to press China hard on the exchange rate issue, we currently lack instruments to make this pressure effective.  Working through the IMF is not appealing – because it just won’t work – and the World Trade Organization (WTO) does not have sufficient jurisdiction on exchange rate issues (if pushed today, it would bring in the IMF to determine the extent of exchange rate undervaluation; again, we’re back to the IMF impasse).
To be sure, Congress could threaten bilateral action but this is a blunt weapon that can easily cause a great deal of collateral damage.  At the Commission’s hearings on Capitol Hill yesterday,  the consensus appeared to be that China should be pressed harder on its exchange rate – including being labelled a “currency manipulator” by Treasury at the next opportunity (in April) – but we should not rush towards any kind of trade war. 
It would be much better to give the WTO teeth vis-a-vis exchange rate manipulation, but this will take a while.  Even in the best case scenario, effective pressure will build only slowly on China.
On the other hand, if China steadfastly refuses to appreciate the renminbi in any significant manner, the damage when the exchange does eventually move could be even greater. 
We should not fear China – our problems are about ourselves, not anyone else.  China should likewise mostly fear the unintended consequences of their own misguided policies.