Saturday, May 22, 2010

Trouble with China as Euro depreciates?

Michael Pettis sees trouble for the U.S. and a heightening of international tension in the depreciation of the Euro and China's corresponding likely reluctance to let the yuan appreciate as much as recently anticipated:
Most policymakers around the world – while publicly excoriating the US for its spendthrift habits – are intentionally or unintentionally putting into place polices that require even greater US trade deficits.

This cannot be expected to happen without a great deal of anger and resistance in the US.  The idea that suffering countries should regain growth by exporting more to the world, and that rapidly growing surplus countries should not absorb much of this burden, will only force the US into even greater deficits as US unemployment rises to reduce unemployment pressure in Europe, China, Japan and elsewhere.
I would be surprised if the US accepted this with equanimity.  On the contrary, I expect it will only exacerbate trade tensions and ensure that next year the dispute will become nastier than ever.

On the (implicit) plus side, Pettis notes (quoting Bloomberg, in italics below) that the U.S. has natural allies in the developing world vis-a-vis the trade surplus of China at least:
[India’s Finance Minister, Pranab] Mukherjee, who served as the foreign and defense minister in Prime Minister Manmohan Singh’s cabinet before being appointed as the finance minister, is under pressure from local exporters to use the Group of 20 platform to campaign against China’s currency policy.

As Mukherjee’s comments suggest, pressure continues growing from a number of countries, especially in Asia, for a Chinese revaluation, and for a while it seemed pretty obvious that China was going to begin revaluing very soon.

The Obama Administration has indicated a readiness to multilateralize its efforts to get the Chinese to take measures to reduce their trade surplus.  We're going to need all the allies we can get. On that front, perhaps the patronizing dismissal of Brazil and Turkey's brokerage of a fuel swap deal with Iran was not the most long-sighted of diplomatic maneuvers.

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