Will the US Declare Economic War on China?

[jimmy olsen]

The present situation is bad, but so is this option. Not seeing much hope on this front.

http://www.guardian.co.uk/commentisfree/2010/mar/28/will-hutton-china-germany

If the US declares economic war on China, we should all tremble

China and Germany exploit the global system without accepting reciprocal responsibilities to manage it. It cannot go on

          o Will Hutton
          o The Observer, Sunday 28 March 2010
          o Article history

In the darkest hours of the financial crisis in the autumn of 2008, it was obvious that all nations' economic destinies were intertwined. Today, that sense of a collective global economic interest is receding. On 15 April, a decision in Washington will be taken, the impact of which will be a sharp reminder than in 2010 all still connects. The United States is to rule, unilaterally, whether China is unfairly manipulating its currency against the dollar to promote its exports; if the case is accepted, it's a de facto declaration of economic war and a signal that now it is every country for itself.

The Americans aren't just making a noise. They will back their judgment with a tariff on Chinese imports into the US and China is unlikely to back down. It will fight fire with fire. Other countries, worried that the Americans and Chinese will dump goods on them that were destined for the Chinese and American markets, will feel it is legitimate to protect themselves in turn. Britain's export markets, open for two generations, will regress towards the closure of the 1930. Hopes of economic recovery will be dashed.

It is not just the US and China that are more economically nationalist. The Europeans finally arrived at a deal to help a Greece stricken with a colossal budget deficit last week, but it was hardly an exercise in European solidarity. Germany dragged its feet and only signed up if the IMF led the negotiations and stumped up a third of any bailout funds; there was no hint that Germany itself might increase public borrowing to reflate its economy to help other eurozone countries in trouble. It was Germany first.

The lack of internationalism is hopelessly short-sighted. All the evidence about the aftermaths of credit crunches where there are high levels of private indebtedness is that bank lending grows at a quarter or less of the rate it grew at beforehand, a hugely depressive effect on the economy. But this is a synchronised credit crunch with a synchronised global slowdown in credit; the depressive effect will be global. The temptation for any single country to use trade and currency policy to capture more of the stagnant pool of jobs is ever-present – it is what the Chinese have been doing for years – but when national economies were booming the impact could be shrugged off. Not today.

In Washington, patience is at an end at China's readiness to export unemployment to the US where the rate is already over 10%. There was open dismay at Prime Minister Wen Jiabao's recent claim to China's National Peoples Congress that countries such as the US, which want China to lift its currency and depreciate their own are protectionist. Chinese foreign currency reserves are climbing by $40bn a month. Already, total reserves top $2.4 trillion. Reserves can only grow so much faster than China's current account surpluses because China is printing more of its own currency to supply to world markets to keep its exchange rate down. Put another way, China is rigging its currency to a degree not paralleled in modern times.

The issue unites Democrats and Republicans. In the New York Times recently, Paul Krugman urged that on 15 April Obama act by slapping on a temporary tariff, as Nixon did on European imports in 1971. The notion that the Chinese have the Americans over a barrel because they finance America's deficits is wrong, argued Krugman. China needs the US to keep its markets open.

Krugman is right that China needs to change its policy. But the risk is that unilaterally slapping on tariffs could be self-defeating, causing the world to retreat into protection, competitive devaluation and prolonged recession. A far cleverer strategy would be to try for a global deal, as urged by Michael Pettis, of Carnegie's China Programme. China needs to be given time to reduce its dependence on exports and build its domestic spending, running at risibly low levels. This means boosting workers' wages, probably allowing trade unions, establishing property rights as collateral for borrowing and permitting its currency to rise.

If China gives that commitment, argues Pettis, the US should reply by saying it will maintain high government borrowing to keep American demand buoyant even as private credit grows slowly. It will keep its markets open. The EU should be part of the bargain, too, with the German government in particular spending and borrowing to maintain demand, and Britain taking an even more gradualist approach to lowering its deficit than the one outlined by Alistair Darling in Wednesday's budget. The aim is to keep global public deficits up to compensate for reduced private credit growth while China adjusts its exchange rate. Thus the world might avert trade war.

I like Pettis's grand bargain, but the chances of it happening are close to zero. First, Obama has to take the risk of trying – and of being snubbed by both China and Germany. Reforms such as extending property rights or encouraging worker power directly threaten one-party rule in China, which is why they are resisted. Thus China chose to reflate through investment rather than reform in 2009, increasing its reliance on exports. It is mercantilist, in that it wants to trade one way, because it is an authoritarian state. The party could thus never agree to its side of any bargain. Neither, after last week's dealings over Greece, would Germany's chancellor Angela Merkel. She hasn't got the imagination to be part of a global bargain to lift the threat of trade war. Obama might be tempted to try, but the political risks of rebuff are too high. Equally, he can't allow China to carry on stealing US jobs. I suspect he will tell China it has six months to change its policy – or else.

For years, we have assumed that trade and globalisation are an inevitable part of the landscape. They are not. China and Germany exploit the global system without accepting reciprocal responsibilities to manage it. It cannot go on. The deficit countries, notably the US but also ourselves to a degree, can no longer play the role we used to as importers of last resort. Britain has to build its productive and innovative capacity as does the US. Economic rebalancing has to be both domestic and international – with give and take on both sides.

The trouble is that neither Germany nor China sees their role in this way. The emerging consensus in America is that only strong-arm tactics will persuade them to change, thus the case for tariffs to leverage the international economic rebalancing that is otherwise being avoided. Britain is particularly exposed. In the 1930s, we could shelter behind a British-devised tariff cast round the empire. Today, we are not even in the euro. Darling's budget, and the debate about what he should cut and how fast he should do it, presumes the world in the years ahead will get back to and stay "normal". That seems ever more improbable. In which case – what is Plan B?

[CountDeMoney]

Of course we won't declare "economic war on China", you tardface.  Too many Republicans make too much money in China.

[Neil]

Of course we won't declare "economic war on China", you tardface.  Too many Republicans make too much money in China.

Couple that with Democratic cowardice, and you have a powerful force for just shutting up and doing whatever the Chinese tell you to do.

[Zanza]

So what exactly is Germany's policy that needs to be revised? It can't be that our currency is undervalued. We also have among the highest wages in the world, certainly in the same league as the USA, so we are not exporting unemployment. The government deficit is like 6% of GDP in 2010 so it does already overspend a lot to reflate the economy. I don't think going to 12% levels of Britain or the USA would make sense at this point - especially when you consider that everybody is saying that those levels are too high. So what can the government do? I read that Germany should rise wages. Maybe. But this is not a command economy, so there is no way the government can make industry and unions to rise wages if they don't want to. Lowering taxes when you have a huge deficit and it is unpopular won't happen either.

[grumbler]

When China is giving me free shit, I with the US government would just STFU.  If it has to say something, it should encourage the Chinese to give us more free shit.

[DGuller]

When China is giving me free shit, I with the US government would just STFU.  If it has to say something, it should encourage the Chinese to give us more free shit.

There are a lot of long term drawbacks to that strategy.

[grumbler]

When China is giving me free shit, I with the US government would just STFU.  If it has to say something, it should encourage the Chinese to give us more free shit.

There are a lot of long term drawbacks to that strategy.

And those drawbacks are mostly for the Chinese.  They are exporting unemployment to Cambodia and Vietnam, true, but that just makes them more unpopular there.

The US trade deficit exists far more because of oil than because of China.

[Legbiter]

If it did the US would win. If the Chinese tried to trigger a US bond crisis, capital controls could be imposed by the US.

[Kleves]

Of course we won't declare "economic war on China", you tardface.  Too many Republicans make too much money in China.

Which Republicans will be making the decision on April 15th?

[DisturbedPervert]

So what exactly is Germany's policy that needs to be revised?

Stop making things

[Razgovory]

Of course we won't declare "economic war on China", you tardface.  Too many Republicans make too much money in China.

Which Republicans will be making the decision on April 15th?

The ones that paid their taxes?

[HisMajestyBOB]

So what exactly is Germany's policy that needs to be revised?

Stop making things

Or let us bomb them again.

[Martim Silva]

Don't bite the hand of your creditor...

Unless you plan on defaulting on your debt, which I don't think is happening anytime soon.

So what exactly is Germany's policy that needs to be revised?

That it exports more than the US does, even though it is far smaller. That is annoying.

[Admiral Yi]

Don't bite the hand of your creditor...

I'll keep this in mind the next time some Latin American idiot starts wailing about economic imperialism.

[Valmy]

Considering how each country's success ultimately depends on the success of the other at this juncture this looks like a lose-lose proposition to me.