You’d think, given the critical role global imbalances played in building up the systemic risk that caused the Great Recession that addressing them would be an urgent issue. China’s everyday flouting of World Trade Organisation trade rules would be bad enough in normal circumstances. But now when Beijing clearly stands in the way of economic recovery, Paul Krugman is right to be exasperated that the Chinese have been allowed to keep taxing imports while subsidizing exports.
If Asia had not rigged its currencies, risk in the developed world would not have been underpriced, and the banks would never have been able to inflate their balance sheets as they did. You don’t have to take it from The Angry Analyst, though. The IMF has concluded that lower interest rates and large capital inflows that resulted from fixing the yuan/dollar exchange rate contributed to the ‘search for yield’, higher leverage, and the creation of riskier assets.
Why then has the response to China’s currency manipulation been so feeble? Perhaps Obama’s administration believed the Chinese stimulus was going to generate enough demand to save the global economy. If so it must be disillusioned, because instead of a material shift in world demand trade imbalances have again increased in 2010. Since the second quarter of 2008 Chinese trade volumes have risen by 14%, but U.S. exports have fallen by 3% in real terms. And there are signs that Chinese imports will now slow.
As long as China actively manages its exchange rate, the scope for U.S. export led growth is slim and the U.S. – and Europe – will pay the price of higher unemployment. And China will continue to take an ever larger slice of world trade.
The good news, though, is that we don’t have to wait for our financial system to heal, and lending to increase, to see a recovery. “The major impediment to a sustained recovery in the global economy is not the sorry state of the developed world banking system – since demand for credit will be extremely limited – but instead the structural lack of final demand in the saver economies,” as Lombard Street Research says. In other words, the economic argument for forcing China to revalue its currency is perfectly sound.
So why should China enjoy unfettered access to Western markets when we don’t enjoy the same in China? This is a question the E.U. and the U.S. are increasingly asking themselves. The U.K.’s new chancellor, George Osborne is astonishing naïve to think exports to the China could be an important source of economic growth, when China’s back-door protectionism is rampant, says the Daily Telegraph.
The E.U. and U.S. ambassadors to the WTO, have openly accused China of increasing barriers to market access over just the last two years – by being “highly selective” in granting access to foreign companies seeking to do business there, and “stagnating” its market access reforms. Such restrictions on foreigners ability to do business in China is only getting worse, agrees the head of the European Chamber of Commerce, Jacques Boisseson – which explains why only 3% of European foreign investment goes to China.
The European Council on Foreign Relations has now circulated a briefing paper urging heads of state to take a more coordinated approach to dealing with China, in order to avoid the divide-and-conquer tactics practised by Beijing. The paper argues that China must be persuaded to drop the protectionist barriers that have remained in place despite the country’s admittance to the WTO in 2001.
Certainly, there is an increasing willingness to face down China on trade issues on both sides of the Atlantic. On 1 Sep the U.S. Commerce Department announced the imposition of preliminary duties of as much as 137.65% on the import of aluminum products from China. Meanwhile the E.U. Commission is extending anti-dumping duties on Chinese made aluminium car wheels to 22.3%, from 20.6%, deliberating plans for to increase the tax on Chinese fiberglass to 50.6% from 7%, and preparing to investigate whether China is unfairly subsidizing makers of wireless modems.
It would be simpler though, if the E.U. and the U.S. could just agree to take robust action on the currency front, instead of pussyfooting around the issue. With unemployment the electoral issue that it is, and with the IMF warning of an explosion of social unrest, Asian currency manipulation is going to have to end if the West wants to show that it gives a damn about its workers.
Related: Stronger Than It Thinks It Is: How Europe Should Deal With China [European Council on Foreign Relations]