UNCTAD is not a fan of a floating exchange rate for China:
Amidst continued financial crisis, the question of the global trade imbalances is back high on the international agenda. A procession of prominent economists, editorialists and politicians have taken it upon themselves to “remind” the surplus countries, and in particular the country with the biggest surplus, China, of their responsibility for a sound and balanced global recovery. The generally shared view is that this means permitting the value of the renminbi to be set freely by the “markets”, so that the country will export less and import and consume more, hence allowing the rest of the world to do the opposite. But is it reasonable to put the burden of rebalancing the global economy on a single country and its currency? This policy brief contends that the decision to leave currencies to the vagaries of the market will not help rebalance the global economy. It argues that the problem lies in systemic failures, and as such, requires comprehensive and inclusive multilateral action.
What they propose instead:
As proposed by UNCTAD in its Trade and Development Report 2009, a number of crucial targets aimed at governing global trade and finance can be met through one measure: a “constant real exchange rate rule”. Since the real exchange rate is defined as the nominal exchange rate adjusted for inflation differentials between countries, a constant real exchange rate (CRER) can be maintained if nominal exchange rates strictly follow inflation differentials. With a CRER rule, higher inflation is automatically offset by the devaluation of the nominal exchange rate.
More details at the link.
The House Ways and Means Committee will be holding hearings on the issue of China's exchange rate policy on March 24. Could be some fireworks.
Finally, yet more from Paul Krugman:
Here’s how the initial phases of a confrontation would play out – this is actually Fred Bergsten’s scenario, and I think he’s right. First, the United States declares that China is a currency manipulator, and demands that China stop its massive intervention. If China refuses, the United States imposes a countervailing duty on Chinese exports, say 25 percent. The EU quickly follows suit, arguing that if it doesn’t, China’s surplus will be diverted to Europe. I don’t know what Japan does.
Suppose that China then digs in its heels, and refuses to budge. From the US-EU point of view, that’s OK! The problem is China’s surplus, not the value of the renminbi per se – and countervailing duties will do much of the job of eliminating that surplus, even if China refuses to move the exchange rate.
And precisely because the United States can get what it wants whatever China does, the odds are that China would soon give in.
Look, I know that many economists have a visceral dislike for this kind of confrontational policy. But you have to bear in mind that the really outlandish actor here is China: never before in history has a nation followed this drastic a mercantilist policy. And for those who counsel patience, arguing that China can eventually be brought around: the acute damage from China’s currency policy is happening now, while the world is still in a liquidity trap. Getting China to rethink that policy years from now, when (one can hope) advanced economies have returned to more or less full employment, is worth very little.
I admit that I'm a little confused by all this. When he was talking about a 25% tariff yesterday, I thought he just meant a 25% tariff on all Chinese imports. But now he is referring to a 25% "countervailing duty." Does he mean that in response to CVD petitions by various U.S. industries, 25% countervailing duties will be imposed on the foreign producers of the like product? Or is he just using the term "countervailing duty" loosely to mean a 25% general duty on Chinese products that "countervails" the currency manipulation? The latter would clearly violate WTO rules. With the former, there's at least an argument that it is consistent. I'm not really sure what he has in mind and whether he cares about WTO-consistency.