It’s fascinating that Tim Geithner, who was portrayed in David Wessel’s In Fed We Trust as a man obsessed in getting the “theater” right during the great panic, so often comes across as the weak character in his run as Treasury secretary. So it is with Geithner’s attempt to hold together the global currency system — and with it the global trading system.
Today at the Brookings Institution, Geithner (kinda) scolded China for keeping its currency artificially low to maintain its export advantage. He said, “we believe it is very important to see more progress by the major emerging economies to more flexible, more market-oriented exchange rate systems. This is particularly important for those countries whose currencies are significantly undervalued. This is a problem because when large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages other countries to do the same.”
I’m sure China, and the increasing number of countries imitating Chinese policies, will get right on this.
In fact, the United States is playing a weak hand. We’re deeply in debt to China, especially to finance our military adventures. We won’t unilaterally start a trade war, not least because so many American companies and American consumers are hooked on cheap Chinese labor and products. Then there’s the potential blowback from China in the form of canceled orders to Boeing, Caterpillar, etc.
The renminbi is undervalued, but it’s only one of many ways that China plays by its own rules in international trade. So even if China allowed its currency to float tomorrow, it would produce only a modest improvement for American workers and the dwindling number of (real) mid-sized and small American manufacturers. Jobs would continue to be sent offshore. Intellectual property would continue to be in danger. China would keep moving ahead with its protected strategic industries. Major corporations nominally headquartered in America would play along.
The uncomfortable conclusion is that the world monetary and trading system put in place by the United States after World War II is crumbling. What will replace it is anyone’s bet, but China will be highly influential.
Today’s Econ Haiku:
The IMF says
Expect slower growth next year
That’s a big surprise