DIIS Comment
Obama goes to China: But US economic diplomacy is unlikely to succeed
Next week, President Obama visits China. US and China have a long-standing disagreement about Chinese exchange rate policy. But this time the US has a new strategy: the jurisdiction over exchange rates should be moved from the IMF to the WTO. Is this a promising proposal - or a sign of desperation?
12 November 2009
Sea change in global power relations
China is today the third largest economy in the world, the largest exporter in the world and the largest lender to the US. As a result, power relations in the global economy are changing. These changes can be observed in the maneuvering of the IMF on particularly delicate issues, such as that of ‘global imbalances’: the notion that the continued co-existence of large trade surpluses in some countries (China, Japan, Germany) and large trade deficits in other countries (mainly the US) destabilizes the global economy.
The Obama-administration has strived to make the agenda of addressing these ‘global imbalances’ a key issue of the ongoing G20 deliberations. The US is particularly frustrated with Chinese exchange rate policy – which is seen to be severely undervalued, and hence a key cause of these ‘global imbalances’ – and of the massive loss of jobs in America. The Chinese, on the other hand, see these issues quite differently.
So where do we find the IMF in all this? Let me quote a news report from the Wall Street Journal last week. It is highly illustrative:
“Unlike the US government…, who see China’s reluctance to allow its currency to rise against the dollar as an impediment to rebalancing the world economy, Mr. Strauss-Kahn [Director of the IMF] shied away from criticizing the Chinese government for its handling of the currency. The value of the Chinese yuan against the US dollar, he said, is “one index but I’m not sure it’s the only one” (WSJ, 4 November 2009).
The fact that the Director of the IMF abstains from taking sides with the US on this crucial issue shows you that power relations in the global economy are really changing. The IMF – commonly perceived to be closely aligned with US interests on central issues – is acting much more carefully vis-à-vis the rising power of the global economy than it would have just a year ago.
So is the US loosing the battle on "global imbalances"?
Does this also mean that the US is loosing the battle on the ‘global imbalances’ issues? By no means. After this weekend’s meeting of the finance ministers and central bank governors of the G20 countries, the agenda has been set for the next two years of G20 deliberations. On top of the agenda is the “G20 Framework for Strong, Sustainable and Balanced Growth”. The key word here is ‘balanced’ – as opposed to ‘imbalanced’. It is difficult not to see this as an attempt to create a framework that will challenge the export-driven growth strategies of the largest Asian economies, including China and Japan. In the future, no countries should run neither large trade surpluses nor deficits – but instead generate a balanced form of economic growth, the underlying reasoning goes.
The big question is, of course, which mechanisms can be agreed upon to ensure that countries pursue policies that are reconcilable with this new paradigm of balanced growth. For the US, the key issue is Chinese exchange rate policy. But in the current situation of quite substantial financial dependence on China, how is the US going to make the Chinese government change an exchange rate policy it has been rejecting to change since 2003?
New consensus: move jurisdiction over exchange rates from the IMF to the WTO
Simon Johnson, former Chief Economist of the IMF, indicated earlier this week what the answer to this question might be. The new consensus in Washington, said Johnson, is that exchange rates should in the future be the jurisdiction of the WTO, not the IMF. Not only does the WTO have much more legitimacy, Johnson explains; it also “has agreed-upon and proven tools for dealing with violations of acceptable trade practices”:
“Extending the WTO’s mandate in the direction of exchange rates would take time – and presumably warrant discussion at the G20 level. The US has great influence over the G20 agenda and Mr. Obama’s staff should hint, ever so gently, that this is where they see the process going”.
Obama faces difficult odds in China
As I write, President Obama is embarking on his debut Asian tour. During the next eight days, he will visit Japan, Singapore, China and South Korea. Four days will be spent in Beijing and Shanghai. If President Obama does indeed take the opportunity to voice this alleged, new consensus on moving exchange rates to the jurisdiction of the WTO, how is China likely to react?
China is more than a little unlikely to be supportive of this idea. It took 15 years to negotiate China’s membership of the WTO – and China, for cultural and other reasons, does not have much appetite for taking disputes to court. There is every reason, in other words, to expect that China will resist the idea of making its exchange rate and economic growth policies subject to international dispute settlement within the WTO.
Indeed, this US proposal for making exchange rates subject to dispute settlement in the WTO – as the way forward in dealing with ‘global imbalances’ – bears testimony to the changing power relations in the global economy: it is, more than anything, a sign of desperation on behalf of a weakened US and its troubled ‘Washington communities’.
It will be interesting to follow G20 negotiations over global imbalances in the course of the next year, culminating with two planned G20 Leaders’ summits in June and November 2010. Perhaps, eventually, John Maynard Keynes’ proposal for an International Clearing Union will experience a revival – when other proposals have failed to break the current deadlock.
China is today the third largest economy in the world, the largest exporter in the world and the largest lender to the US. As a result, power relations in the global economy are changing. These changes can be observed in the maneuvering of the IMF on particularly delicate issues, such as that of ‘global imbalances’: the notion that the continued co-existence of large trade surpluses in some countries (China, Japan, Germany) and large trade deficits in other countries (mainly the US) destabilizes the global economy.
The Obama-administration has strived to make the agenda of addressing these ‘global imbalances’ a key issue of the ongoing G20 deliberations. The US is particularly frustrated with Chinese exchange rate policy – which is seen to be severely undervalued, and hence a key cause of these ‘global imbalances’ – and of the massive loss of jobs in America. The Chinese, on the other hand, see these issues quite differently.
So where do we find the IMF in all this? Let me quote a news report from the Wall Street Journal last week. It is highly illustrative:
“Unlike the US government…, who see China’s reluctance to allow its currency to rise against the dollar as an impediment to rebalancing the world economy, Mr. Strauss-Kahn [Director of the IMF] shied away from criticizing the Chinese government for its handling of the currency. The value of the Chinese yuan against the US dollar, he said, is “one index but I’m not sure it’s the only one” (WSJ, 4 November 2009).
The fact that the Director of the IMF abstains from taking sides with the US on this crucial issue shows you that power relations in the global economy are really changing. The IMF – commonly perceived to be closely aligned with US interests on central issues – is acting much more carefully vis-à-vis the rising power of the global economy than it would have just a year ago.
So is the US loosing the battle on "global imbalances"?
Does this also mean that the US is loosing the battle on the ‘global imbalances’ issues? By no means. After this weekend’s meeting of the finance ministers and central bank governors of the G20 countries, the agenda has been set for the next two years of G20 deliberations. On top of the agenda is the “G20 Framework for Strong, Sustainable and Balanced Growth”. The key word here is ‘balanced’ – as opposed to ‘imbalanced’. It is difficult not to see this as an attempt to create a framework that will challenge the export-driven growth strategies of the largest Asian economies, including China and Japan. In the future, no countries should run neither large trade surpluses nor deficits – but instead generate a balanced form of economic growth, the underlying reasoning goes.
The big question is, of course, which mechanisms can be agreed upon to ensure that countries pursue policies that are reconcilable with this new paradigm of balanced growth. For the US, the key issue is Chinese exchange rate policy. But in the current situation of quite substantial financial dependence on China, how is the US going to make the Chinese government change an exchange rate policy it has been rejecting to change since 2003?
New consensus: move jurisdiction over exchange rates from the IMF to the WTO
Simon Johnson, former Chief Economist of the IMF, indicated earlier this week what the answer to this question might be. The new consensus in Washington, said Johnson, is that exchange rates should in the future be the jurisdiction of the WTO, not the IMF. Not only does the WTO have much more legitimacy, Johnson explains; it also “has agreed-upon and proven tools for dealing with violations of acceptable trade practices”:
“Extending the WTO’s mandate in the direction of exchange rates would take time – and presumably warrant discussion at the G20 level. The US has great influence over the G20 agenda and Mr. Obama’s staff should hint, ever so gently, that this is where they see the process going”.
Obama faces difficult odds in China
As I write, President Obama is embarking on his debut Asian tour. During the next eight days, he will visit Japan, Singapore, China and South Korea. Four days will be spent in Beijing and Shanghai. If President Obama does indeed take the opportunity to voice this alleged, new consensus on moving exchange rates to the jurisdiction of the WTO, how is China likely to react?
China is more than a little unlikely to be supportive of this idea. It took 15 years to negotiate China’s membership of the WTO – and China, for cultural and other reasons, does not have much appetite for taking disputes to court. There is every reason, in other words, to expect that China will resist the idea of making its exchange rate and economic growth policies subject to international dispute settlement within the WTO.
Indeed, this US proposal for making exchange rates subject to dispute settlement in the WTO – as the way forward in dealing with ‘global imbalances’ – bears testimony to the changing power relations in the global economy: it is, more than anything, a sign of desperation on behalf of a weakened US and its troubled ‘Washington communities’.
It will be interesting to follow G20 negotiations over global imbalances in the course of the next year, culminating with two planned G20 Leaders’ summits in June and November 2010. Perhaps, eventually, John Maynard Keynes’ proposal for an International Clearing Union will experience a revival – when other proposals have failed to break the current deadlock.
Topics
Obama goes to China
But US economic diplomacy is unlikely to succeed