The Currency Wars and Global Trade Imbalances
In the run up to the Seoul Summit, the issue du jour has become “the currency wars.”
I certainly side with those who think that the under-valuation of the Chinese currency and its fix to the US dollar at that low level constitutes a huge subsidy to Chinese exportsÂ which has played a major role in the creation of large global trade and balance of payments imbalances, especially as between China plus developing Asia on the one hand and the US on the other. The fact that China (like Japan and Germany and the oil exporters) piles up US dollars in huge hoards of sterilized foreign exchange reserves rather than spend them on imports also gives a major deflationary bias to the global economy as a whole.Â And it seems pretty clear that the US cannot continue to be the buyer of last resort for the global economy as a whole, letting everybody else grow through exports.
So, something has to give if there is to be sustained global recovery. But I am somewhat skeptical of the majority view (eg of the IMF and the OECD) that an upward revaluation of the renminbiÂ in and of itself would make all that much of a difference given the underlying structure of global trade under the neo liberal rules of the game.
True, there would be a difference at the margin. The Chinese trade surplusÂ with the rest of the world would shrink to some degree, and the US trade deficit would shrink to some degree.
However,Â it is far from clear that theÂ US would replace imports from China with US domestic production in a major way.Â The US now has very limited capacity to produce mass consumer goods of the kind which arrive by the millions of containers in West Coast ports to be trucked to Walmarts across the nation.Â Much of the loss of Chinese market share in the US would go to other developing country producers such as Mexico, whose maquiladora plants have been recently losing production and jobs to China,Â and countries like Vietnam which can even today under-cut the “China price”. US and other transnational corporations would tweak their global supply chains to find low cost production sites rather than relocate production back to the US.
In principle, China should contribute to re-balancing by shifting from export led growth to growth led by domestic consumption. This would be a good thing, especially if based not just on a currency realignment but also on rising Chinese wages and the creation of a social safety net which would encourage Chinese workers to buy rather than to save at current sky high levels. The Chinese government seems to be leaning in this progressive direction, as shown by their tacit acceptance or even encouragement of trade union activity.
That said,Â Chinese consumption has to grow from very low levels relative to US let alone total global demand, and this will take time.Â True, China is now a big economy, but it is net exports and investment which currently make up the lion’s share of demand.Â And the US domestic economy has only limited capacity to produce the kind of goods that Chinese consumers will want to buy. If and when China shifts to growth driven by domestic demand, parts of the export oriented manufacturing sector will switch to serving the domestic market, and imports from other developing country producers of mass manufactured goods will rise.
China’s imports are not just low relative to exports, they are also overwhelmingly tilted to raw materials and to sophisticated capital goods. The US obviously has some export capacity in both of these areas, but it is limited. Chinese imports of capital goods come mainly from Japan, Korea, TaiwanÂ and Europe, and it is hard to see that changing very much.
Put it all together, and an upward revaluation of the renminbi would likely not have a major impact upon the US trade deficit, nor upon US growth and employment.
What then could and should be done?
While currency realignments and a re-orientation of the Chinese growth model would have some impact, I strongly suspect that the US trade deficit is not going to shrink dramatically unless and until there is a major change in US trade policy.Â The US could attempt to reach a bilateral managedÂ trade deal with China to gradually unwind the huge bilateral trade deficit. Effectively, this would mean persuading China to give a preference to US exports as the quid pro quo for coninued access to the US market. Or the US could simply resort to raising tariffs and other trade barriers to limit the growth of imports irrespective of where they come from.
Such measures are, of course, totally inconsistent with WTO rules and the neo liberal trade paradigm. But they are on the US domestic political agenda.
Which is precisely why, one suspects, that Geithner et al are pretending that modest currency realignments would make a significant difference.