Quotes of the Day

On Capitol Hill on Thursday, Tim Geithner sent a little thrill up the leg of all the American trade unions that worked so hard to get Barack Obama elected. The Treasury Secretary–designate — whose appointment, despite his embarrassing tax travails, was waved through to the full Senate yesterday by the Finance Committee — declared in a written statement to the committee that China was guilty of "manipulating" its currency for trade advantage.

For all the pressure the Bush Administration put on Beijing to increase the value of the renminbi (RMB), which increases the price of Chinese-made goods in export markets and thus in theory should help diminish China's massive trade surplus, the U.S. Treasury has never formally cited China for currency manipulation. Doing so under U.S. law would compel the White House to open formal negotiations with China over its currency policy. Trade hawks in Congress, pushed by union allies and some manufacturing lobbies in Washington, have long pined for this. But the Bush Administration resisted, preferring to fold the currency issue into the broader biannual "strategic economic dialogue" (SED) started by former Treasury Secretary Hank Paulson. That less confrontational setting was more likely to produce results on the currency issue than any forum that smacked of the U.S. putting Beijing on trial for "manipulation," the Bushies believed. In fact, over the past two years, the RMB did rise nearly 20% against the dollar. (Read "China's Trade Slump Worsens in December.")

Geithner's rhetoric before the Senate raises the question: Is the less confrontational approach now history? The short answer: in tone, perhaps. But in substance, not a whole lot is likely to change. The young Treasury Secretary–designate knew the "manipulator" line would get a lot of attention, as it has. So the tone is already different. Further, though Beijing may not know this yet (and will be mortified to learn), some senior economic officials in the new Administration have made it plain that they have little use for SEDs. Some view them as pointless, time-consuming gabfests that accomplished little from the U.S. perspective (which is exactly why the Chinese loved them). For the Obama crowd, the SEDs may be DOA, though one senior official tells TIME that there will no doubt be some other configuration for Cabinet-level talks between Beijing and Washington.

Read "Can Tim Geithner Lead the Economy Out of Its Mess?"

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But beyond tougher rhetoric, is the new Administration really likely to get tough with China on trade, as so many union supporters of Obama hope? Unlikely. In fact, it's hard to think of anything business and investors on both sides of the Pacific would welcome less right now than a U.S.-China trade rumble. Both countries are in the midst of serious economic pain, which trade tensions would only worsen. There are enough comparisons with the Great Depression out there already without dredging up the memory of Smoot-Hawley, the 1930 legislation in the U.S. that put a tariff on some 20,000 imported goods — to devastating effect on trade.

Geithner, despite the rhetoric before the Senate, understands this better than most. He spent much of his career in the 1990s at the Treasury Department working on international issues, with particular emphasis on Asia. He understands how complex the bilateral economic relationship with China is and will probably be inclined to resist pressure to formally cite Beijing as a bad actor on currency. (See pictures of the global financial crisis.)

That reluctance is not necessarily for the reason often cited when U.S.-China trade issues come up. A frequent assertion by critics of U.S. trade policy is that Washington can't afford to get tough with China on trade because Beijing buys so much U.S. Treasury debt. Washington can't even say "Boo" to the Chinese, this argument goes, without risking that China would take its money and go home, driving U.S. interest rates up in the process.

This is a fundamental misreading of the U.S.-China economic relationship. The Chinese RMB would go up in value relative to the dollar (exactly what some critics seek) if the Chinese did repatriate more of the money they earn via exports instead of reinvesting those dollars back into Treasuries. But the Chinese, despite some scary stories that have circulated to the contrary, show absolutely no sign of doing that. In November, the last month for which data is available, Beijing actually added $29 billion to its overall position in U.S. debt. (Beijing sold $9.2 billion of long-term U.S. Treasuries in November but bought $38.2 billion of short-term government notes.) Indeed, part of the reason short-term interest rates are so low in the U.S., as Council on Foreign Relations economist Brad Setser notes, is that foreign central banks — including China's — are doing the same thing private investors have been doing: pouring funds into short-term, highly liquid, dollar-based assets. If China reversed course and pulled money out of the U.S. in a big way, it would ravage the value of its own portfolio, which is still largely invested in long-term bonds and notes. This is the essence of mutually assured economic destruction, and the Chinese understand that as well as anyone.

Perhaps it's true that if sufficiently angered by U.S. trade policy, China would feel compelled to inflict economic pain on itself by dumping U.S. debt, in order to send a message to Washington. But Geithner, despite his brief rhetorical flourish about manipulation, knows what his job is when it comes to persuading foreigners (whether governments or individuals) to continue to invest in Treasuries. Sources close to the Administration say that thus far he has argued privately that "what the world wants to know, first, is that we are going to fix this [economic and financial] problem and make people confident in the quality of the stewardship of the economy." The world also wants to know, one source close to Geithner says, "that we are going to make sure the U.S. will grow over time and that we will continue to be open to the world for trade and investment."

A trade conflict with China, Geithner knows, doesn't fit anywhere in that prescription.

See the worst business deals of 2008.

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