By Clive Crook
Published: October 10 2010 20:00
The US is experiencing sluggish growth, high and persistent unemployment, and a trade deficit that has widened again this year. The country’s mood is bleak. As you may have noticed, elections are approaching. Amid all the talk of a “currency war” between the US and China, the greatest surprise may be that talk, so far, is all we have had.
The surge in protectionism that looked likely in 2008 has not happened. Not yet. Politicians in the US and elsewhere deserve credit for restraint – and so do their electorates, because if US voters were demanding militant trade policies, Washington would already have delivered. The truth that proliferating trade disputes end up hurting everybody appears to have sunk in. Still, one wonders how long this forbearance can last.
Forces pushing the US and China towards a cycle of sanction and retaliation are building. An initially strong US recovery has faded. Consumers are paying down debt, with a long way to go, and this is holding back domestic demand. More important, employment is lagging unusually far behind the growth in output, such as it is. (Instead of seeing job creation at the normal rate, the economy is getting higher productivity.)
An emerging orthodoxy holds that it will be years, if ever, before unemployment falls back to the 4-6 per cent to which the US had become accustomed. The costs of the recession, on this view, are at least partially permanent rather than transitory. This fear could easily be self-fulfilling, because it weakens confidence and further undermines the case for additional stimulus. If the equilibrium rate of unemployment has risen, scope for remedial monetary and fiscal policy is diminished.
Which leaves getting tough with China. US complaints about China’s currency policy are right: it is indisputably protectionist. Persistent, deliberate undervaluation works exactly like import tariffs combined with export subsidies. Since China announced a loosening of the renminbi’s peg to the dollar last June, the currency has hardly budged.
The cheap-renminbi policy violates at least the spirit of the undertakings China has made as member of both the International Monetary Fund and the World Trade Organisation. And the damage this policy does to other countries is real. If the renminbi were allowed to appreciate, US exports to China would rise, and employment would be boosted. A stronger renminbi would not cure America’s economic ills, but it would certainly help.
If forthright economic action against China – countervailing duties on Chinese imports, say – were likely to succeed, there could be no principled objection. The retaliating countries would be in the right.
But there you have the question on which advocates of stronger action need to focus more sharply: would it, in fact, succeed? Do not ask whether it would be justified, ask whether it would work.
Looking at this question in the spring, I argued for caution on the US side – and this has been the administration’s approach. Aggression might easily backfire.
June’s promised loosening of the renminbi peg, in anticipation of the Toronto summit of the Group of 20 nations – and in tacit recognition of China’s growing international responsibilities – suggested that “softly, softly” might get results. The truth is that China reneged, ignoring those who called for patience and vindicating those who said appeasement would fail. This weekend’s IMF meetings made no real progress on the issue.
Stronger action, despite the risks, ought now to follow. The emphasis should still be on orderly multilateral arrangements rather than unilateral action. Through the IMF and the WTO, the US and Europe can aim to gratify China’s desire for a bigger leadership role, while binding all countries to firmer rules on currencies and other policies with international spillovers.
Those other policies, by the way, might give the US an insight into China’s sensitivities. China complains, and it has a point, that US fiscal policy must change to help rebalance the world economy.
Stronger IMF surveillance over currencies – especially if tied to WTO-sanctioned penalties – should work alongside more intrusive surveillance of fiscal policy. That is a concession China could be granted in return for behaving more responsibly on exchange rates.
Meanwhile, the US and other countries have a possible course of action at the WTO under existing rules which forbid “frustrating the intent of the provisions of this agreement by exchange action”. They should organise to pursue it, and as part of that effort the Obama administration should formally deem China a currency manipulator – a decision it previously postponed (rightly, as I thought at the time) only to get nothing in return.
Since this falls short of immediate unilateral sanctions, many in the US will see it not as a measured escalation but as the continuation of appeasement by other means. Yet a balance must be struck. Firmer policy towards China is needed, but the risk of starting a cycle of retaliation and far greater mutual harm should not be dismissed.
This is a dangerous moment. It was splendid to see the Nobel Peace Prize go to the imprisoned Chinese dissident Liu Xiaobo – but with economic tensions on the rise, the timing gave me pause. How much pressure on China is too much? We may find out.
Copyright The Financial Times Limited 2010
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