China's customs bureau said exports to the U.S. and other countries increased 38.1% in July to $145.5 billion, while imports were up 22.7% at $116.8 billion.
The surplus was the highest in 18 months and comes after China announced June 19 that it would allow its currency, the yuan, to move higher against other currencies like the dollar. The yuan had been pegged at a fixed dollar rate since last 2008.
Maybe a One-Month Distortion?
"Do I think Congress will be upset by today's numbers, which included a 10% rise in Chinese exports to the U.S.?" asks Mark Chandler, global head of currency strategy at Brown Brothers Harriman in New York. "Of course, they will be upset about it, but what can they do? China is a member of the World Trade Organization, and we can't just retaliate against some imaginary violation."
Chandler says one reason for the sharp increase may be that China ended export tax subsidies across a wide range of products in July, which prompted many businesses to move up export shipments to June. That may have distorted the trade figures by showing a sharp increase in U.S. imports from China in June, he says.
But that isn't deterring some representatives from leaping into action. Rep. Brad Sherman (D-Calif.), has introduced a bill to strip China of the most-favored-nation trade status it was awarded in 2001, making it eligible for reduced customs duties.
"The U.S.-China trade relationship is horrendously lopsided and it has not lived up to the promises of those who encouraged us to give preferential trade treatment to China," Sherman said in a statement.
"Only at the Beginning"
In addition, a group of a U.S. senators signed a letter last week saying there's "no doubt that the Chinese government is manipulating its currency to keep its value lower than it would otherwise be, which gives its exports a significant rice advantage over U.S. manufactured goods."
Treasury Secretary Timothy Geithner said last week that it's too early to know how much the Chinese will let the yuan rise. "They're only at the beginning of the process, and what matters is how far and fast they let it move," he said. The Obama administration decided in July against branding China a currency manipulator as many in Congress had demanded.
According to Chandler, the yuan has appreciated about 0.9% against the dollar since the June announcement. He says the currency market is pricing in a 12-month rise for the yuan of about 1.5%, which is far below the level it was allowed to increase on annual basis in the period from 2005 until 2008.
A Surplus of 7% of GDP?
William Cline, a senior fellow at the Peterson Institute of International Economics, says the Chinese would have to allow the yuan to appreciate by 15% to target a current account surplus -- trade and financial flows -- of about 3% of GDP. The International Monetary Fund is projecting that by 2015 the Chinese current account surplus will be more than 8% of GDP.
"If the Chinese were to appreciate the yuan at a steady pace of 10% a year for a couple of years, that would go a long way toward solving the resulting imbalances," Cline says. "What they have done so far is certainly not sufficient by itself, but it opens the door to having a continued appreciation of the currency over time."
Cline says his research "throws cold water" on claims that exchange rates don't have a major impact on trade flows. American exporters, led by the U.S. Chamber of Commerce, have pressed the Obama administration to take more steps to get the Chinese to raise the value of the yuan.
But Chandler says such steps are misplaced. Not only are the Chinese unlikely to respond positively, he says, but the record of U.S. trade flows shows that the U.S. had a bigger deficit with China in 2008 after three years of yuan appreciation than it did in 2005 when the currency started its rise.
He says the main reason for China's announcement of a new yuan policy in June may have been to stop the flow of speculative investment funds into China by investors who expected a quick yuan appreciation.
"The Chinese succeeded in dampening speculation of a revaluation, and now that many people have given it up, that's when I think they will do it," Chandler says. Still, he adds that the appreciation may be limited to only about 2% to 3%, far below the level Congress is demanding. If that's the case, expect the calls for retaliation to get only louder.