With the spectre of a double-dip recession still haunting large parts of the global economy, one can see a measure of anxiety among monetary authorities around the world who are resorting to a not-so-subtle currency war to make their exports more competitive at the cost of other economies. Competitive devaluation of the currency or other measures like keeping monetary policy extremely loose, which also weakens the currency, is being seen as standard practice to keep economic growth going. Of course, China is seen as a past master of this game, having kept the yuan undervalued by at least 30-40% against the dollar. The Brazilian finance minister has warned against this race to the bottom. The G-20 meeting in South Korea is expected to thrash out some broad framework agreement on the issue, which the US President Obama declared as the single most important issue during his meeting with Chinese Premier Wen Jiabao on the sidelines of the UN General Assembly.
With the US unemployment problem far from getting resolved, Obama has made it clear that he is going to ?protect the US economic interest and we look for the Chinese to take actions. If the Chinese don?t take action we have other means of protecting the US interest?. Now that clearly sounded like a veiled threat. Obama said he wanted more significant movement on the Chinese yuan in the months ahead and, as a pressure tactic, even authorised specific complaints against the Chinese trade practices at the WTO. Meanwhile, there is a political consensus building among the US lawmakers that a piece of legislation must be brought to check China?s ?currency misdemeanours?.
Last week the global finance ministers also met at Washington to discuss an urgent solution to the growing differences over ?exchange rate policy?, which has emerged as an important strategic tool in the recovery phase after the global recession. However, China has been using the currency as a ?strategic brahmastra? for over a decade now, resulting in a foreign exchange surplus of over $2 trillion now, largely built from exports to the US.
After its strategic handshake with the US in the 1970s, China has virtually built its export economy on the ever-growing consumption demand of the US population. An undervalued yuan has, over the years, helped the American middle class enjoy cheap clothing and other accessories of daily use. In a way, a cheaper yuan has made the average American realise his/her material comforts on a consistent basis at perhaps 40-50% less cost than if the same material had been produced in America.
So, the Chinese have used an undervalued currency as a strategic tool for over two decades to penetrate the ?materialist consciousness? of the average American. This is a more potent weapon than any you can find in a military handbook. Most so-called strategic experts did not even understand the potency of this economic weapon until after the Chinese merchandise had become a part of the basic need of the American middle class.
This also explains why America can do little to address the yuan undervaluation issue beyond a point. The Chinese know this only too well. For American businesses exporting out of China also enjoy the benefit of an undervalued yuan. Besides, given America?s plight today, with real median incomes at the same level as five to seven years ago, any drastic revaluation of the yuan will further reduce real incomes of the middle class in the US. The Chinese have deeply penetrated the labour-intensive goods market. For instance, the bulk of the Christmas merchandise is shipped from China. So this gives the Chinese a special hold over the American day-to-day consumption needs. This also explains why the US will never be able to do to China what it did to Japan back in the 1980s when it forced the Plaza Accord down the Japanese throat because the latter had become too competitive in the US automobile market, essentially with the help of a cheaper currency.
America was then a far more assertive power and managed to gently persuade Japan to let the yen appreciate in the 1980s when Japan?s current account surplus peaked at between 4% and 5% of GDP. China?s current account surplus is at 10% of GDP today and the Americans can?t do much about it. Another reason why the pressure against China is not the same as that against Japan in the 1980s is simply that American businesses have virtually vacated the manufacturing space globally in favour of China. In the 1980s, American businesses did compete vigorously against Japan in manufacturing. If anything, American CEOs now talk about relocating large parts of their business in this part of the world. This, in fact, is the biggest strategic shift that rooted diplomacy could never comprehend.
So the fact is America?s sabre-ratting against China on the currency issue is not something that worries the Chinese unduly. After all, just after Obama came to power, when the effects of the financial crises were still unfolding, Hillary Clinton did appeal to China that it should keep buying US treasury bills with the surpluses earned from exporting to the US. That was simply a call to support the dollar, which is seen as losing steam on a long term basis by most experts. For that reason alone America would need China?s support in the foreseeable future.
Of course, this will not prevent America from garnering support from countries like India, Brazil, South Korea, etc, to keep the pressure on China at the G-20 on the currency issue. In fact, America has additionally stepped up pressure on the Chinese by speaking aggressively on behalf of China?s southern and eastern neighbours like Japan and Vietnam, who want more freedom to navigate in the South China Sea, something Chinese officials hate. There is also growing talk of the US Navy actively cooperating in the Indian Ocean with countries that feel somewhat threatened by China. In reality, all that is happening is the love-hate relationship between the US and China is being taken to another sustainable level!
mk.venu@expressindia.com
