China's Trump Card

Chapter 2Trade Imbalances and the Greenback

2.1 The Missing Link between Trade and Currency

Officially established in 1995, the World Trade Organization (WTO) was previously called the General Agreement on Tariffs and Trade (GATT) and was supposed to be the global platform for member states to reduce trade and investment barriers. GATT was formed in 1947 shortly after the establishment of the IMF and the International Bank for Reconstruction and Development (of the World Bank Group) in 1944. Immediately after the war, the Allies mostly agreed to rebuild the global economy through closer economic cooperation. They could quickly reach a consensus to develop the financial order of the world. But for trade, the proposal to set up an International Trade Organization was not approved by the US Congress (Fergusson 2007).

The outcome of the Bretton Woods Conference had already implanted a disconnection between trade and monetary policy. This disconnection continued to persist. In the US–China trade negotiation, Chinese Vice Premier Liu He and the US Trade Representative Lighthizer were bargaining their terms of trade ranging from the amount of goods China promised to buy, the level of import tariff, the extent of market access China granted to US companies, and perhaps even the companies included in the Entity List. Their trade talks also touched on China's exchange rate practice, a subject the first course of International Finance could cover.

The US Treasury designated China as a ...