Ah, soft power: a chorus of nations urges yuan appreciation

On several occasions I have flagged wise voices urging the U.S. to seek allies (Aryind Subramanian) and work through multilateral channels (Jeffrey Garten)  in its effort to convince China to let its currency appreciate. Recently, Larry Summers was singing from the same page:

...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).

Not to jump at shadows, but it looks like more pieces on Obama's international chess board may be moving into position on this front.  From today's FT:

China is facing growing pressure from developing countries to begin appreciating its currency, providing unexpected allies for the US in the diplomatic tussle over Beijing's exchange rate policy.

Speaking ahead of a meeting of finance ministers and central bank heads from the Group of 20 countries which starts today in Washington, Indian and -Brazilian central bank presidents have made the most forceful statements yet by their countries about the case for a stronger renminbi. [snip]

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:

Revenge of the Communists

At the height of U.S.-Soviet collaboration during World War II, Franklin Roosevelt imagined a fusion of economic systems: 60% ours, 40% theirs. The collapse of the Berlin Wall and breakup of the Soviet Union would seem to have consigned this vision to the dustbin of history. But Yale's Jeffrey Garten, marking The unsettling zeitgeist of state capitalism in today's FT, suggests that "the era of free markets unleashed by Margaret Thatcher and reinforced by Ronald Reagan is fading away." Garten brings the surging growth of China, Russia and India into focus as a retooled statism that retains a strong tincture of communist aims and impulses.

While Garten acknowledges that "governments are reacting against the excesses of free markets" - citing "soaring income inequality," unsupervised product quality and poor financial risk management - he sees this turn of the wheel mainly as a negative:

The implications are worrying. While prudent regulation in selected areas can be justified, the new zeitgeist is likely to produce too much government intervention, too fast. We can expect less productivity, less innovation and less growth, since governments have many goals that the private sector does not. These include employment generation, income redistribution and the aggrandisement of political power. The expansion of regulation will also open up new possibilities for trade disruption. For example, countries may block the importation of goods that do not meet their precise national environmental standards.

Since Garten acknowledges "soaring income inequality" as an "excess," one might think he would acknowledge the need for a degree of income redistribution. And many would consider strict enforcement of national environmental standards a good thing. Most Americans, on the other hand, would regard the post-Communist mix of one-party dictatorship and state-controlled capitalism "worrying." But wherever one stands on the free market/state regulation spectrum, Garten has brought a really arresting global trend into sharp focus. He sees state intervention on the rise not only in the post-communist east, but in the US, the EU, China and the WTO.

Even during the Cold War, there was wide variation within the free world in the degree of state control over the economy; France, Japan and Korea achieved high growth rates in economies in which priorities and investment were heavily shaped by the government. It's true that for a long season, chronic economic woes in Japan and Europe seemed to auger a continuing shrinking of the welfare state, state ownership of economic resources, and state regulation. But now, Garten shows, the pendulum is swinging back toward governmental assertiveness. The EU is showing renewed competitive vigor vis-a-vis the U.S., and in the U.S. itself, a still-tentative but emerging confidence in the Democrats seems to point toward universal health coverage, stronger environmental regulation, and rollback of the Bush tax cuts for the wealthy. Plainly, the end of economic history has been greatly exaggerated.