Escalating the US-China currency dispute without tariffs


Daniel Gros and Fred Bergsten are proposing that the US use policy instruments other than tariffs to pressure China to appreciate the renminbi.


But there is another way. The US (and Japan) could easily prevent the Chinese Central Bank from continuing its intervention policy without breaking any international commitment. The US and Japan only need to invoke the principle of reciprocity and declare that they will limit sales of their public debt henceforth to only include official institutions from countries in which they themselves are allowed to buy and hold public debt. Instead of the “moral suasion”, tried in vain by the Japanese, the Chinese authorities would just be told that they can buy more US T-bills and Japanese bonds only if they allow foreigners to buy domestic Chinese debt.

Imposing such a “reciprocity” requirement on capital flows would be perfectly legal – although the US (and Japan and all EU member countries) have notified the IMF that they have liberalised capital movements under Article VIII of the IMF. Yet, in contrast to the area of trade, there are no legal constraints on the impositions of capital controls.


This gap can be filled, however, by the introduction of a new policy instrument: countervailing currency intervention. When China or Japan buy dollars to keep their currency substantially undervalued, the US should sell an equivalent amount of dollars to push back. The IMF should authorise such intervention when necessary, to discipline countries that are violating their obligations by engaging in deliberate undervaluation.

Setting aside the desirability of the move, there would seem to be a number of practical challenges in implementation.