Currency manipulation

In his confirmation hearings, incoming U.S. Treasury Secretary Timothy Geithner was unequivocal: President Barack Obama believes China is manipulating its currency. This seemed precisely what many of U.S. politicians wanted to hear — Sen. Lindsey Graham (R-S.C.) said Geithner’s judgment was “music to my ears.”

But talk, even tough talk, is cheap. And although likely to be all but ignored by the media and pundit class, Geithner also was clear the Obama Administration was reserving tactical flexibility: “The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current environment.”

Although the tactic of labeling a country as a currency manipulator has not been deployed for years (in its semiannual assessment, the U.S. Treasury has not done so since China in 1994), it is a rather toothless policy in many respects. The law simply requires the U.S. to engage the accused party in official talks to redress the situation. The fact that China joined the World Trade Organization in 2001 would seem to limit the kind of retaliation the U.S. can legally pursue.

Also, while some U.S. companies might seek compensation if China is cited as currency manipulator, a number of U.S. corporations will lobby against such a claim, such as Caterpillar, Cargill, and Ford. Talking tough on China may provide another tactical advantage, possibly helping President Obama win over much-needed votes if he, as indicated, would like to have the pending free-trade agreements with Columbia, Panama, and South Korea approved.