It is time to move beyond the global imbalance perspective and see China’s exchange rate policy for what it is: mercantilist trade policy, whose costs are borne more by countries competing with China – namely other developing and emerging market countries – than by rich countries. The circle of countries taking a stand against China must be widened beyond the US to ramp up the pressure on it to repudiate its beggar-thy-neighbourism. But progress also requires that the silent victims speak up.
Looking to the longer term, Jeffrey Garten of Yale made a complementary argument (also in the FT) not only that broad groupings of nations need to cooperate to help move Chinese policy, but that they need to do so by institution-building -- strengthening existing multipolar organizations like the WTO in the short term and building new ones over time:
The best existing example is the World Trade Organisation, where China is obliged to play by the rules that a number of leading countries have subscribed to, and which has an orderly process of adjudication. While it still has leadership clout, the centrepiece of US efforts ought to be marshalling multilateral support for other such arrangements. It should press for a new, strengthened global monetary system based on multiple currencies, with enforceable rules for currency management to which both it and China would subscribe. Washington should redouble efforts to work with a number of countries on an enforceable climate change treaty. It should garner other nations’ support for global arrangements regarding the operation of the internet.In today's FT, Subramanian continues the thought-train. He proposes that Timothy Geithner sidestep an either/or trap in April, when he is required to make an official determination whether China is a "currency manipulator" or not, by seeking a "multilateral rules-based solution" whereby the World Trade Organization acts as enforcer for the IMF-as-currency-umpire:
The World Trade Organisation is a natural forum for developing new multilateral rules. First, undervalued exchange rates are de facto protectionist trade policies because they are a combination of export subsidies and import tariffs. Second, the WTO has a better record on enforcement of rules. Its dispute settlement system, although not perfect, has been reasonably effective in allowing members to initiate and settle disputes. The WTO has greater legitimacy than the IMF – developing countries, even smaller ones, have been active in bringing disputes to the WTO. Tiny Antigua (population: 69,000) managed to successfully challenge US gambling laws.Subramanian envisions this new rule being developed through negotiation with China, with WTO membership for China offered as a sweetener. Like Garten, he is proposing a financial new world order -- which in a global economy is also in large part a political order.
What is needed is a new rule in the WTO proscribing undervalued exchange rates. The irony is that export subsidies and import tariffs are individually disciplined in the WTO but their lethal combination in “an undervalued exchange rate” is not.
The IMF would continue to be the sole forum for broad exchange rate surveillance. But in those rare instances of substantial and persistent undervaluation, we envisage a more effective delineation of responsibility, with the IMF continuing to play a technical role in assessing when a country’s exchange rate was undervalued, and the WTO assuming the enforcement role.
Just who would assemble this coalition of the to-be-made-willing, and how, remains hazy. Sounds like a question of aligning interests, first against and then with China. Would it be an easier negotiation than, say, imposing sanctions on Iran? Subramanian in any case seems to envision action in the WTO within a pretty short time frame-- action that would further Garten's long-term goals.