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.

FT triptych: a "multilateral web" for China

Six weeks ago, I 'collated' the thoughts of a two China-watchers who advocate a multilateral approach to attempting to moderate China's de facto protectionism. To recap: Aryind Subramanian of the Peterson Institute argued in the FT 

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:

Building a new world order as China rises

Last week, Aryind Subramanian of the Peterson Institute argued in the FT that China's exchange rate policy hurt other developing countries even more than it hurt the U.S., and so the U.S., rather than taking the burden of trying to move Chinese policy on its own, should put together what you might call (okay, what I called) a coalition of the wounded:

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.

Today, also in the FT, Jeffrey Garten of Yale makes a complementary argument, looking to the longer term. Garten, too, argues that broad groupings of nations need to cooperate to help move Chinese policy to serve the common interest. But he's looking not so much at short-term goals around which coalitions can coalesce, but rather  in effect to gradually build a new world order: to strengthen existing multipolar organizations like the WTO and build new ones in which China will want to participate:

Against the Weak Yuan, a Coalition of the Wounded?

To the rising chorus of voices crying, "China is mercantalist," Aryind Subramanian of the Peterson Institute adds a fresh perspective: China's exchange rate policy primarily hurts other developing countries:

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. Emerging market and developing countries must do a “Google” on China.

That is, it's time to assemble a coalition of the wounded:

Hence the third consequence. By default, it has fallen to the US to carry the burden of seeking to change renminbi policy. But it cannot succeed because China will not be seen as giving in to pressure from its only rival for superpower status. Only a wider coalition, comprising all countries affected by China’s undervalued exchange rate, stands any chance of impressing upon China the consequences of its policy and reminding it of its international responsibilities as a large, systemically important trader.

Bearing this thesis out, China today upped the ante on U.S. complaints about the yuan: