Saturday, April 03, 2010

Larry Summers takes a long and multilateral view of China and trade rebalancing

As China signals that it is ready to start letting yuan appreciate again, Larry Summers, in an interview with the FT's Martin Wolf, gives some important hints as to the Administration's long-term approach  toward China.

With regard to exchange rates and a more general rebalancing of trade, both between the U.S. and China and more generally between high-export and high-consumption economies, two of Summers' emphases in particular are noteworthy: 1) a global rebalancing of supply and demand should be pursued through multilateral channels and institutions -- the U.S. should seek allies and so diffuse the expectation (and possibility) of gladiatorial combat between the U.S. and China over exchange rates; and  2) it's going to take time -- rebalancing the world economy is a project of years and probably decades, and yuan appreciation is only one piece in a complex (re)balancing act.

On the first point, Summers is very careful to build the multilateral context:
MW Okay, just tell me about where you are on the exchange rate question vis-a-vis China and the adjustment process vis-a-vis China.

LS The G20 made a common commitment last year in London, reiterated in Pittsburgh, to seeking more stable and balanced global growth. And I think we’ve made more progress in laying a foundation for restored global growth than has yet been made in assuring more balanced global growth - to be sure that growth, the pattern of growth over the last year, has been more balanced, with trade deficits and trade surpluses both coming down. But as the global economy recovers, it will be very important not to see a major resumption and a major widening of imbalances.
Obviously, we are very mindful of that with respect to our fiscal policies, and we think that countries with large surpluses need to be focused on shifting the pattern of demand towards reliance on domestic demand.
And clearly, exchange rates, which are the relative price of domestic and foreign goods, are one crucial aspect of that, and so I think that’s going to have to be an active area for international consideration going forward because I think all countries have a stake in more balanced growth, and I think where there are large reliance on external growth, that does raise questions about the sustainability of the expansion.

And so in our dialogue with China through the strategic economic dialogue, in our participation in the IMF with its enhanced mechanisms for global surveillance, as we move towards the G20 meetings in Canada and Korea this year, I think these are going to be very important issues (my emphasis).
On this point Summers is very much in sync with Aryind Subramanian and Jeffrey Garten, two China watchers who have made the case in the FT that many countries have an interest in reducing trade imbalances abetted by an undervalued yuan, and that the only effective way to influence Chinese policy is through multilateral institutions and negotiations.

Asked whether the current large reduction of China's trade and current account surpluses is likely to last or is a short-term result of the financial crisis, Summers took a long view:
I think we’ll be in a better position to answer that question two years from now, and the ultimate answer will depend upon policy choices that get made both in the United States and in China over the next months. What I think is important is that we act in a way that makes for durably more balanced global growth, not merely cyclically more balanced global growth
It was Martin Wolf who forecast in early 2009 that a drumbeat for confrontation with China over its exchange rate policy would build as unemployment bit deep and lingered. That drumbeat has indeed arrived on cue; Summers himself recently struck a beat.  For the moment, it looks as if the Obama Administration, with some movement from China, may succeed in diffusing the tension.

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