As expected, Treasury has put off a decision on whether to label China a currency manipulator for a few months, pending negotiations with China. The problem is, however, is that China has been signaling that it is pretty non-negotiable (yes, there has been the occasional conciliatory remark, but they have been notably few and far between).
The fact that Chinese President Hu Jintao is coming to Washington on an unrelated matter (a nuclear summit) when there were concerns that he would snub the US over various affronts, like Obama’s meeting with the Dalai Lama, is a positive development. Yet to read the press, you’d think spring was busin’ out all over in the US-China category. And that at least in part seems to reflect a tendency towards black v. white characterizations rather than an assessment of the state of play.
Yes, talking with China is decidedly better than not talking. But China has also been quite willing in very public forms like the IPCC to take a hard line position. The flip side is the US does have a nuclear option. Declaring China a currency manipulator and then following through with various trade restrictions would hurt China much more than the US (after all, the US needs to get its economy into a better balance of savings and consumption, and weaning itself off unduly cheap imports is one starting point). But the US wants Chinese help on Iran, which the Chinese no doubt see as a significant bargaining chip.
The reality is the US has made a tactical error: China’s cheap currency is a problem for not just the US, but for the EU, India, and other countries. This should be a multi-lateral, not a bi-lateral discussion. But the Chinese leadership may not have many degrees of freedom. As James Mann noted in The New Republic:
This time, however, the tough line on domestic dissent has gone hand-in-hand with a distinct hardening of its positions on a series of international issues. At the U.N. Security Council, China has emerged as the principal obstacle to multilateral efforts to stop Iran from acquiring nuclear weapons. China has pursued essentially mercantilist policies by maintaining an undervalued currency, despite repeated appeals from the United States, Europe, and elsewhere. By most accounts, China helped lead the way in preventing any serious action against climate change in Copenhagen last December. After tightly circumscribing Barack Obama’s visit last November, China has taken tougher positions than it had in the past toward U.S. arms sales to Taiwan and a visit to Washington by the Dalai Lama. But it isn’t just the United States: The Europeans, the British, and the Indians have all run up against what seems like a new Chinese assertiveness, too….
The most obvious explanation, and the one most frequently put forward, is that China has finally recognized its own growing power…..The problem is that this explanation doesn’t quite add up….
In fact, China’s recent assertiveness sometimes seems counterproductive, in ways that China’s foreign policy usually is not. More commonly, China has been skilled at flexible, soft-shoed diplomacy; the aim has been to keep other major powers divided and, where possible, competing with one another for influence in Beijing. But China’s recent policies on human rights, on maintaining the low value of its currency, and on climate change have all tended to remind Americans and Europeans of their shared values and interests in dealing with China.
If Chinese foreign policy has been (on many levels) counterproductive, that may be because its intended audience isn’t in Washington or Brussels. That is, its international strategy is increasingly driven by undercurrents at home. The Chinese leadership seems uneasy about losing control. For the past several years, it has worried about the development of a popular movement comparable to the ones that produced the “color revolutions” in Ukraine and Georgia.
Yves here. It would be useful to get the input of people who know politics within China, but I have to think making anything that looks like a real concession to the US (save perhaps on Iran, which may not be very high profile internally) is not going to go over well domestically. So are we going to see a timetable on remnimbi appreciation (and I mean more than a token two or three percent, or maybe a further widening of the “dirty float” band)? It would be better if I were proven wrong, but I would not hold my breath here. Indeed, aside from Hu’s decision to come to the US, there appear to be no conciliatory signals from the Chinese side, while the US officialdom has backed down on its rhetoric.
Now readers and some commentators have pointed out that the level of the remnimbi is far from the only issue here; both the US and China need to restructure their economies so as to become less co-dependent. That means, among other things, China having to shift to a consumption-led economy. That is a ten to twenty year project, when the US and the rest of the world needs a faster adjustment (as in they are no longer willing or able to keep accumulating debt at the level needed to sustain a high level of Chinese exports). Some of the adjustments in the US are already starting to happen (as in manufacturers starting to move more production back to the US). There are other structural issues it would behoove us to address, but we won’t because they smack too much of industrial policy (so we instead have industrial policy by default, through which industry gets the most bennies via the strength of its lobbying efforts). Setting priorities for infrastructure would be one; another would be to reverse the idea that a college degree is necessary for employment, and start creating meaningful vocational tracks in high school, as many educational systems in Europe do. Of course, that would hurt community colleges, but they could stand to have a run for their money (and given the concerns about dependency ratios in the US, having kids who wanted to get to work sooner able to get to work sooner would be a plus).
But the US-China row illustrates much deeper issues. The usual way for indebted nations to get out from under their overhang is a partial repudiation of the debt (via defaults or restructuring) and a currency depreciation to help the debtor country avoid a deflationary shock and earn enough to pay off the debt that remains. Before readers start arguing that the debtor “ought” to pay his obligations, that line of thinking is misguided. The resulting deflation not only assures default, but produced greater collateral damage (not just greater ultimate economic costs in the debtor country and its trade partners, but political instability).
But what do we have now? We have the financial oligarchy in charge in most advanced economies, so they are successfully resisting the needed debt restructurings, and getting various states to reimburse them for this misadventures. So realistic debt workouts are not taking place. Similarly, the “depreciate your way to semi-prosperity” route is blocked because so many nations want to play that game right now. Some countries have to be willing to be importers, and no one seems particularly interested in that role right now. This suggests a possibility that is seldom discussed in polite company, namely, that the level of trade we have come to think of as normal, indeed virtuous, maybe an unsustainable aberration. Carmen Reinhart’s and Kenneth Rogoff’s showed that high level of international capital flows, which usually goes hand in hand with high levels of international trade, is associated with large and frequent financial crises.
So we may be between a bigger rock and a hard place than most realize. It isn’t just that President Hu may lack the room as well as the inclination to concede much, and Congress is likely not to feel very conciliatory if that comes to pass. The bigger issue is that the least costly way for many players to get out of their economic mess – renegotiation of debt and currency depreciation – is partially, if not fully, blocked. The resulting pressures and dislocations have the potential to produce even bigger ruptures.