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.

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:

Krugman calls for a trade war with China

When the financial meltdown was in full career, a mantra voiced by a chorus of economists, central bankers and world leaders was to avoid a cascade of protectionist measures like the round of retaliatory tariffs that magnified and prolonged the Great Depression.  "Beggar thy neighbor" -- as in protect your own market, destroy your trading partners' -- had to be the most-employed phrase on the Financial Times Comment page in 2009. Obama, a calming influence at the G-20 in late March, struck this note calling for a measured trade rebalancing on April 3:

Now, the U.S. will remain the largest consumer market, and we are going to make sure that it's open. One of the principles that we very clearly affirmed in London was that protectionism is not the answer. It's not the Germans' fault that they make good products that the United States wants to buy. And we want to make sure that we're making good products that Germans want to buy. But if you look overall, there is probably going to need to be a rebalancing of who's spending, who's saving, what are the overall trade patterns.

For the most part, the warnings held, and major economies held off from imposing major tariffs.  Yet the danger, as framed by Martin Wolf a year ago (Jan. 6, 2009), is a prolonged one, with the pressure to protect national markets increasing over time:

Now think what will happen if, after two or more years of monstrous fiscal deficits, the US is still mired in unemployment and slow growth. People will ask why the country is exporting so much of its demand to sustain jobs abroad. They will want their demand back. The last time this sort of thing happened – in the 1930s – the outcome was a devastating round of beggar-my-neighbour devaluations, plus protectionism. Can we be confident we can avoid such dangers? On the contrary, the danger is extreme. Once the integration of the world economy starts to reverse and unemployment soars, the demons of our past – above all, nationalism – will return. Achievements of decades may collapse almost overnight.

Now comes Nobel Laureate Paul Krugman, ringing in the New Year by demanding...our demand back.