Bill Emmott - International Author & Adviser

Article

Why the US and China must close the gap
The Times - April 5th 2010

First they seemed at loggerheads, now Beijing and Washington appear keen to cosy up. There’s a deal to be done

In international affairs, perceptions are swinging back and forth as wildly as British opinion polls. Barely two months ago, America and China were said to be at loggerheads, with a supposedly assertive and confident China cutting up rough over President Obama meeting the Dalai Lama, over the sale of arms to Taiwan and over any suggestion that China’s pegged exchange rate is somehow manipulated. Moreover, America was in decline, Mr Obama was a hopeless failure, and China was a land of strategic geniuses.

Now all is sweetness and light, with President Hu chatting for an hour with President Obama by phone on Thursday and abruptly changing his travel plans to attend Mr Obama’s special “Nuclear Security Summit” in Washington on April 12-13 and thus, it is said, to support the next phase of America’s effort to squeeze Iran. In return, Timothy Geithner, the US Treasury Secretary, has postponed a biannual report to Congress on April 15 in which he was due to say whether China is a “currency manipulator”.

Since of course it is, and since scores of Congressmen are hot to trot with retaliatory tariffs and protectionist legislation, delay was the only way of avoiding a trade war. A few months, or even just weeks, ago, this would have been seen as further evidence of America’s weakness, of its constant need to kowtow to a rising superpower that owns trillions of dollars worth of Treasury bonds. Not any longer. Something has changed.

Obama-philes will be wont to attribute this to their hero’s recent successes: the passing of a marginally helpful but politically treacherous healthcare reform; the signing of a treaty with Russia to cut nuclear weapons stockpiles. But it takes more than that to convince Chinese presidents to take your phone calls.

In truth, what has changed is that reality is reasserting itself. Perceptions always take time to catch up. The first reality is that America remains the world’s strongest country, in both economic and political terms. This reality is coming back into focus with the American economic recovery: after a recession that was shallower than Europe’s or Japan’s, America’s rebound now looks like being a lot more vigorous, with the latest employment figures suggesting jobs are again being created, in abundance.

If that job creation continues and mops up the very large pool of unemployed and underemployed, the Obama Administration will stand a good chance of pushing back protectionism and of limiting the Democrats’ losses in the November congressional elections. And with healthcare under his belt, Mr Obama does have a stronger position with his party, which is home to many of the fiercest protectionists. With plenty of troubles ahead, especially fiscal ones, it may be a few years before America’s return to economic leadership becomes fully apparent or accepted. But that is what is likely to occur.

The second reality concerns China. While China is certainly a lot stronger and more confident than five, ten or 15 years ago, it remains many years away from feeling insouciant about a real clash with America. Domestic stability is paramount for China’s Communist Party leaders, so if clashing looked to be the price of keeping that stability they would no doubt pay it. But the opposite is likelier, since a clash would cast doubt over a main source of China’s economic progress, namely globalisation amid adherence to the rules set by multilateral bodies, notably the World Trade Organisation (WTO).

A third reality, therefore, applies to both countries, and should be reassuring for the rest of us. It is that they both need to work through multilateral institutions and rules. America will not soon be strong or arrogant enough to think it can act unilaterally, as it did often under George W. Bush and occasionally under Bill Clinton, though it (especially Congress) always retains a unilateral instinct. And China needs the assurance and the domestic political cover that global rules bring.

In the case of Iran and its nuclear weapons programme, there is no real alternative to the multilateral method. It may fail anyway, but bombing Iranian nuclear facilities would be far, far worse. America needs support from China and Russia, who not only hold vetoes in the UN Security Council but are also Iran’s juiciest market and friendliest nuclear supplier respectively.

On trade and global economic imbalances, there is always a unilateral alternative. America could, as many in Congress would like, impose emergency penalties on Chinese imports proportionate to the subsidy deemed to be provided by the pegged exchange rate. But, at least on its own, that would do about as much good as bombing Iran. A bilateral trade war would occur, hurting both sides, and in a challenge in the WTO’s courts America might even lose, raising the risk of a confrontation with the WTO itself, and thus with the rest of the trading world.

That is why postponement of the April 15 report on currency manipulation makes sense. Coming up is the next summit of the broad, nicely inclusive and nicely well-publicised Group of 20 (G20) in Toronto in June. The best way to deal with unfair currency policies is to force it to the top of the G20 agenda, and to make sure that America has plenty of allies on this issue, notably Europe, India, Brazil and the IMF. Hectoring by Uncle Sam is prone to put China on the defensive. Pressure in a multilateral framework stands a chance of helping the Chinese leadership to overcome domestic opposition to a policy change.

For that is the situation China is in. With inflation on the rise and its foreign-exchange reserves climbing towards an absurd and unuseable level of $2.5 trillion (£1.6 trillion), China needs to revalue its currency and move towards some sort of full currency convertibility, if it is to maintain stable economic policies and to start to play a fuller role as an economic power.

There is a deal to be done, trading the recommencement of Chinese currency appreciation (which was halted in 2008) and the announcement of a programme to achieve convertibility for a new arrangement at the IMF to let all or part of those $2.5 trillion reserves be converted into the fund’s quasi-currency, with special drawing rights, and thus with reduced currency risk. Other currency-peggers, in Asia and the Gulf, could be pushed to follow suit. When all sides stand to benefit, such a deal should surely be done.


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