Bill Emmott - International Author & Adviser


Gang up on China - that´ll be value for money
The Times - October 11th 2010

It has not been a comfortable few days for China, except for those Chinese hardliners for whom foreign criticism just acts to stiffen their spines. To give the Nobel Peace Prize to Liu Xiaobo, the brave dissident locked up in 2009 for campaigning for democracy, was a splendid and courageous bit of snook-cocking at the world’s leading authoritarians, though alas the Chinese Communist Party will easily shrug it off. That is less true, however, of the growing pressure over the Chinese currency which has dominated the annual meetings of the International Monetary Fund and World Bank in Washington this weekend.

            The air is thick with talk of “currency wars”, of the fear that more and more countries will try to manipulate the value of their currencies in order to cheapen their exports and make imports dearer. In truth, the phrase is more geared towards newspaper headlines than to reality: unless countries decide to give up almost 40 years of floating exchange rates and restrict their money’s convertibility by reimposing capital controls, thus copying the Chinese approach, this will be a war without weapons. Yet behind the headlines, there are other ominous possibilities.

            When the era of floating rates began, in 1971 when President Richard Nixon abruptly abandoned the link between the dollar and gold that had been the foundation of the post-war fixed-currency system known (after the place where it was agreed upon) as Bretton Woods, there was another Asian country widely accused of unfair trading. It was Japan, whose rapid, environmentally dirty growth in the 1960s, based on cheap labour and a cheap, fixed currency, had produced a big trade surplus and was being blamed for America’s trade deficit.

            At that time, America really did have a currency weapon in its hands: by abandoning Bretton Woods and the link to gold, Nixon could force other countries to revalue their currencies against the dollar. He did so as part of a deal, in which he removed a 10% surcharge on all imports that he had imposed several months earlier. The yen soared in value. The Japanese have ever since called this “the Nixon shock” which, combined with the 1973 oil-price hike, forced their companies and their government to move their economy sharply upmarket, towards higher technology and greater energy efficiency.

            Today, there are some crucial differences but one important similarity. The similarity is that tensions over currencies and trade imbalances are centring on a rising Asian giant, one whose rapid, environmentally dirty growth has been based on cheap labour and a cheap fixed currency: China, of course. The differences are that a Nixon-style import surcharge would be illegal under World Trade Organisation rules, and that thanks to floating exchange rates the currency weapon is not in the hands of President Barack Obama but rather the Chinese themselves, for only they can choose to relax capital controls and to float their currency. It is harder now to have an “Obama shock”. But it is not impossible.

            China cannot just ignore the pressures and the war-like talk, much as it would like to. The reasons are twofold. First, that the pressure is not just coming from America and the West, but now from other “emerging” countries too. Second, that the chances of snook-cocking against World Trade Organisation rules by imposing import surcharges are rising.

            The talk of “currency wars” was begun not by westerners but by Brazil, whose finance minister, Guido Mantega, chose to give warning of such conflicts in an interview a month ago with the Financial Times. The Brazilian real, which floats freely, has been climbing in value against the dollar—and hence also against the Chinese renminbi. India has also been muttering about its rupee, as has South Korea about its rising won.

            This is awkward for China because it likes to paint itself as the chief defender of emerging countries against the selfish West. When the Group of 20 holds its summit next month in South Korea, the risk is that not just the West but much of the world will be lined up against China’s currency policy. Given that China wants allies such as Brazil, India and Korea on other issues, such as voting power in the IMF or climate-change measures for the environment summit in Cancun, Mexico, in early December, that would be bad news.

            It would also be bad news, not just for China but for the whole world, if all the anti-China, currency war rhetoric were to turn into genuine protectionist measures. The US House of Representatives passed a bill recently that would empower the US government to impose tariffs on imports from countries that “manipulate” their currencies unfairly, which China certainly does. Whether it will pass the Senate is unclear, as is the attitude of the Republican Party to such measures after that party’s probable victory in the mid-term Congressional elections on November 2nd. But with unemployment staying stubbornly high, and with President Obama and his Democratic Party running scared of losing the White House in 2012, the chance of President Obama himself initiating such a measure is increasing. He may not be Richard Nixon, but he could have a go at getting a shock named after him.

            If America were to use such shock therapy on its own, its chances of success would be limited. China would certainly challenge any import tariffs at the WTO, and it might well win. But if Brazil, India, South Korea and others, as well as the European Union and Japan, were to stand alongside America, China’s position would be a lot weaker.

            Thus, given all the talk about currency wars, America has an excellent window of opportunity between now and the G20 summit: it should rally support for a concerted programme of measures, which could encompass both tariffs and capital restrictions, that would be implemented by a wide range of G20 members if China refuses to budge. It sounds like ganging up, and it is: for China, the world’s second largest economy and its biggest goods exporter is a glaring anomaly in the global currency system, the only big economy to have a fixed currency. 

            On China’s side, though, there is also scope for a deal. Gradualism is now hard-wired into the Chinese leadership: the country doesn’t do “great leaps forward” any more. So it should lay out and offer a phased programme of liberalisation for the renminbi, under which capital controls would be removed over two or three years and the currency’s appreciation would be accelerated, in return for much-increased voting power for China and other emerging economies at the IMF and for a scheme to help the country to swap part of its vast $2.4 trillion in foreign-exchange reserves into the IMF’s safer basket of currencies, the “special drawing rights”.

            The deal sounds so rational, for both sides. Which is probably why it will not happen.


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