Trading insults

Wed, Oct 13, 2010, 01:00

THE FAILURE by the United States and China to narrow their differences on currency policy at last week’s meeting of the International Monetary Fund (IMF) represents a serious setback for greater global economic co-operation. The meeting very publicly exposed deep divisions between both countries at a time when political tensions between the two are rising. In the US, where midterm congressional elections are due in November, Congress last month passed a bill that would allow sanctions against China for manipulating its currency in order to secure a trading advantage for its exports. In China, where the communist party is preoccupied with a leadership change in 2012, its leaders are reluctant to bow to mounting international pressure for a change in its exchange-rate policy.

The IMF meeting, meant to lay the foundation for some greater co-operation on the co-ordination of national economic policies, instead ended in mutual recrimination. And that has made it harder to reach agreement at the gathering in Seoul next month of the Group of 20 industrialised and developing nations.

The problem stems from huge trade imbalances between China and its trading partners, most notably the US. China, which is in substantial surplus, refuses to allow its currency to appreciate. This would help America, which is in deficit, to increase its exports to China and so reduce its massive trade imbalance. The US sees China as an economic superpower which recently overtook Japan to become the world’s second largest economy. It could overtake America by 2030. But China sees itself as a developing economy and feels it should be treated as such. As a country where one-fifth of the world’s population lives, China’s economic size merely reflects its huge population. By a more meaningful measure of its wealth – income per head – China remains a relatively poor country.

China’s reluctance to allow its currency to rise reflects its concern to maintain competitiveness in order to maximise export-led growth and employment. But in a world where international economic imbalances are so great; where developed economies are encumbered by debt and consumers have less appetite for Chinese exports, China has little option but to reduce its over-reliance on the export sector and to boost domestic consumption. And to stop a simmering currency war from becoming a trade war, it needs to question the political and economic wisdom of undervaluing its currency to aid its exporters in a world beset by recession and deflation.