There's been a spate of stories over the past few days suggesting that China is about to shift its policy on the yuan, allowing the currency to appreciate against the dollar. Keith Bradsher's latest in the New York Times has the most detail, so let's look at his story:
The Chinese government is set to announce a revision of its currency policy in the coming days that will allow greater variation in the value of its currency combined with a small but immediate jump in its value against the dollar, people with knowledge of the consensus emerging in Beijing said Thursday....
The model for the upcoming shift in currency policy is China’s move in 2005, when the leadership allowed the renminbi to jump 2 percent overnight against the dollar and then trade in a wider daily range, but with a trend toward further strengthening against the dollar. For the upcoming announcement, however, China is likely to emphasize that the value of the renminbi can fall as well as rise on any given day, so as to discourage a flood of speculative investment into China betting on rapid further appreciation, they said.
The emerging consensus within the Chinese leadership comes as Treasury Secretary Timothy F. Geithner held meetings on Thursday with senior Hong Kong officials and prepared to fly on Thursday evening to Beijing for a meeting with Vice Premier Wang Qishan.
Now, given the degree of hostility between China and the United States as late as last month, we have to ask the question: what caused the shift in China's policy? Bradsher provides multiple answers:
China’s commerce ministry, which is very close to the country’s exporters, has strenuously and publicly opposed a rise in the value of China’s currency over the past month. But it appears to have lost the struggle in Beijing as other interest groups have argued that China is too dependent on the dollar, that a more flexible currency would make it easier to manage the Chinese economy and that China is becoming increasingly isolated on the world stage because of its steadfast opposition to any appreciation of the renminbi since July, 2008....
People with knowledge of the policy deliberations in Beijing said that Chinese officials had made the decision to shift the country’s currency policy mainly in response to an assessment of economic conditions in China, and less in response to growing pressure from the United States and, less publicly, from the European Union and from developing countries.
So, what's going on? First, it's possible that the policy shift will just be a token move. I'm confident that China won't appreciate as much as, say, Chuck Schumer wants. That said, this doesn't sound like a token-y move.
If China's shift is a real one, there appear to be three possible sources of change:
1) Domestic factors and actors convinced China's leadership that diminishing marginal returns for keeping the yuan fixed and masively undervalued had kicked in;
3) China responded to threats of unilateral U.S. action, such as being named as a currency manipulator, and/or calls for a trade war;
These are not mutually exclusive arguments, and we might never know exactly what caused China's . But for the record, I think (1) and (2) maqttered a hell of a lot more than (3). That said, I can't rule out the possiblity that their antics helped scare China into action.
Am I missing anything?
Treasury Secretary Timothy Geithner makes it pretty clear how he thinks the next few months will unfold with respect to China's exchange rate policy:
I have decided to delay publication of the report to Congress on the international economic and exchange rate policies of our major trading partners due on April 15. There are a series of very important high-level meetings over the next three months that will be critical to bringing about policies that will help create a stronger, more sustainable, and more balanced global economy. Those meetings include a G-20 Finance Ministers and Central Bank Governors meeting in Washington later this month, the Strategic and Economic Dialogue (S&ED) with China in May, and the G-20 Finance Ministers and Leaders meetings in June. I believe these meetings are the best avenue for advancing U.S. interests at this time....
China's inflexible exchange rate has made it difficult for other emerging market economies to let their currencies appreciate. A move by China to a more market-oriented exchange rate will make an essential contribution to global rebalancing.
Our objective is to use the opportunity presented by the G-20 and S&ED meetings with China to make material progress in the coming months.
In layman's terms, the Obama administration has decided that it will rely on multilateral pressure to get China to change its policy rather than take the unilateral route -- for now. In blog terms, the administration rejected the Krugman/Bergsten/Schumer approach to pressuring China in return for... well... my preferred approach.
Which automatically makes me nervous, of course, because I could easily be wrong. Still, there have been signs that other members of the G-20 feel the same way as the United States. And it's also true that the hour-long conversation between President Obama and President Hu seems to smoothed over a lot of recent contretemps. Indeed, Nicholas Lardy told the New York Times that on Iran and North Kotrea the U.S. was getting a fair amount in return for deferring the report.
A few Chinese central bankers and think-tankers are now making noise about movements on exchange rates. Making this shift via G-20 and bilateral channels -- rather than in response to a Treasury finding of currency manipulation or Congressional threats of protectionism -- gives China a more politically palatable justification for policy change. Beijing will likely move in the right direction, albeit more slowly than anyone else would like.
And, if nothing happens from these meetings, China can be named in the fall. Indeed, the paradox of two-level games is that there needs to a rising but manageable possibility of protectionist action by the United States to give China an incentive to alter their policy.
In many ways, this is put-up-or-shut-up time for the G-20. If the U.S. has no option but to name China, it starkly demonstrates the limits of the G-20 process at forcing policy coordination. If, on the other hand, China pursues a more accomodationist approach, then that augments the G-20's prestige as a useful forum.
UPDATE: Simon Lester has a round-up of reactions.
Both the Guardian and the New York Times have stories today suggesting that the Sino-American relationship is on the mend. Last night Barack Obama and Hu Jintao spoke on the phone for, like, a whole hour. It was such a good chat that Air Force One sat on the tarmac at Andrew Air Force base for ten minutes so Obama could finish the call.
There has been an appreciable shift in the past week. Hu pledged to attend the Obama's nuclear proliferation summit a few weeks from now. U.S. oficials sound confident that China is on board for another round of United Nations sanctions against Iran -- though the negotiations for that could take a while. It also appears that China has not followed through on sanctions against U.S. companies for arms sales to Taiwan. On the American side, at a minimum, the Treasury Department has deferred submitting its report to Congress on Chinese currency
manipulation practices for a little while. The headline for this Vikas Bajaj story suggests that Hu's visit "may signal easing by China on currency," though there's no actual evidence in the story backing up that asserrtion.
1) Economic tensions. Tim Geithner, the US Treasury Secretary, has just publicly expressed his concern about the very high levels of US unemployment and many American economists, including in the administration, blame America’s problems in large part on “Chinese mercantalism”. If the Chinese refuse to let the RMB appreciate, or even allow only a modest appreciation, then a clash will eventually happen.
2) Climate change: Remember Copenhagen? There is no sign that the two nations are going to move any closer on this most divisive issue.
3) Iran - A new pacakge of sanctions could head this one off. But they are unlikely to be strong enough to satisfy the US or - let us not forget - to achieve their objective.
4) The mega-trend in the background is the rise of China and the relative decline of the US - and the expression of this will be the gradual challenge to American military hegemony in the Pacific. This will not be a comfortable process.
So look beyond today’s headlines. I can assure you, the Chinese do.
Well..... let's think about this for a second. The first three issues are all about more than the bilateral Sino-American relationship. On the economic front, there's evidence that China has ticked off other countries beyond the United States. On Iran, the U.S. was careful to line up support on sanctions from the Britain, France and Russia, leaving China as the sole P-5 holdout. And on climate change, at a minimum, China came out of Copenhagen looking like something of a bully.
My take of the past six months is that the Chinese overplayed their hand very badly across an array of issues, irking not just the United States but other significant countries. In response, the U.S. has been able to exploit multilateral resentment as a way of
teaching Beijing about the security dilemma putting subtle pressure on China to moderate its tone and actions. As for the mega-trend, well, that's happening, but it's still quite a ways off.
Rachman still makes some decent points. There are fundamental conflicts of interest. Going beyond the issues Rachman mentions, there's also minor stuff like the fact that China and America's domestic regimes look a wee bit different.
For now, however, much of China's recent bluster turned out to be self-defeating. What will be interesting to see is how both Washington and Beijing will learn from the recent spot of unpleasantness.
UPDATE: Hmm.... this Financial Times story by Jamil Anderlini and Alan Beattie is very interesting:
Beijing may adjust its policy of pegging its currency to the dollar provided a visit this month by Chinese President Hu Jintao to Washington goes smoothly, according to a top adviser to China’s central bank.
Li Daokui, a professor at Tsinghua university and a member of China’s central bank monetary policy committee, said as long as the US respected China’s “core interests” the currency disagreement could be easily solved.
Barack Obama and his Chinese counterpart talked for an hour on Thursday evening, during which Mr Hu stressed that the “proper handling of Taiwan and Tibet” was the biggest factor in Sino-US ties, according to China’s state media.
“As long as this is understood, everything else will be easy to handle and we will find the key to unlock the exchange rate problem,” Mr Li told the Financial Times.
MANDEL NGAN/AFP/Getty Images
I see I was not the only blogger to point out the Paul Krugman = neoconservative argument -- see Ryan Avent's recent posts over at Free Exchange, which also challenge Krugman on the question of whether an appreciating yuan would actually reduce macroeconomic imbalances. It's safe to say that the neocon meme got Krugman and his supporters a wee bit snippy.
Krugman has posted a more substantive reply, however, and Avent has responded as well. They are debating across a number of issues: 1) whether the Chinese government can truly control China's consumption rate; 2) whether a revaluation would in fact lead to an improvement in U.S. exports/macroeconomic imbalances; and 3) The best way to get China to alter its status quo policies.
On the first two questions, I find myself siding with Avent on the first point (it's going to take a looong time for China's consumption rate to increase) and with Krugman on the second point (revaluation would still make a difference). Scott Summer, Michael Pettis, and Tom Oatley have all also posted thoughtful responses/critiques of Krugman that are worth checking out.
I want to focus on the third question, however -- what's the best way to pressure China into altering its position? Krugman's proposal in his op-ed was Nixon redux -- slap on a 25% import surcharge and let slip the dogs of a trade war. It was the unilateralist (and violation-of-WTO-trade-rules) aspect of Krugman's proposal that sparked the neocon snark on my part. In my opinion, the U.S. should not act in a unilateral manner on the currency issue when other countries are also seriously put out with China's behavior. I'm not saying it should be off the table, either -- but it's a policy of last resort rather than first resort. Coordinated action to isolate China -- through the G-8, G-20, and other international bodies -- seems like the next step, rather than slapping on an import surcharge.
Krugman elaborates -- a bit -- here:
Here’s how the initial phases of a confrontation would play out – this is actually Fred Bergsten’s scenario, and I think he’s right. First, the United States declares that China is a currency manipulator, and demands that China stop its massive intervention. If China refuses, the United States imposes a countervailing duty on Chinese exports, say 25 percent. The EU quickly follows suit, arguing that if it doesn’t, China’s surplus will be diverted to Europe. I don’t know what Japan does.
Suppose that China then digs in its heels, and refuses to budge. From the US-EU point of view, that’s OK! The problem is China’s surplus, not the value of the renminbi per se – and countervailing duties will do much of the job of eliminating that surplus, even if China refuses to move the exchange rate.
And precisely because the United States can get what it wants whatever China does, the odds are that China would soon give in.
Look, I know that many economists have a visceral dislike for this kind of confrontational policy. But you have to bear in mind that the really outlandish actor here is China: never before in history has a nation followed this drastic a mercantilist policy. And for those who counsel patience, arguing that China can eventually be brought around: the acute damage from China’s currency policy is happening now, while the world is still in a liquidity trap. Getting China to rethink that policy years from now, when (one can hope) advanced economies have returned to more or less full employment, is worth very little. (emphasis added)
Look, Krugman is blogging here -- I'm sure that he's thought about the political economy dimension a bit more that a single post suggests. That said, Krugman is talking exactly like the most neocon of neoconservatives was before Iraq. He evinces complete disregard for existing multilateral structures, makes casual assumptions about how allies will line up behind the United States and adversaries will simply fold, and underappreciates the policy externalities that would take place if his idea was implemented.
On the multilateralism point: as Simon Lester points out, a countervailing duty applied against all of China's imports across the board because of currency manipulation would be a flagrant violation of WTO rules. So, question to Krugman (and Bergsten): are you prepared to jettison the WTO to alter China's behavior? Because that's exactly the policy choice you're setting up in your proposal.
This leads to the next problem -- Krugman/Bergsten's assumptions about how other countries would react. First of all, I'm not sure at all that China will roll over. I agree with Krugman that China's compellence power over the United States is limited. The thing is, America's compellence power over China is also limited. It's the larger economy and the deficit country, so it does have some leverage. What Krugman is suggesting is a huge demand, however -- one that would have wrenching effects on China's domestic political economy. Expectations of future conflict between the two countries are quite high, and have escalated in the past two months. Chinese nationalism is pretty robust at the moment, and nationalists are willing to make economic sacrifices rather than suffer a perceived blow to their country's prestige. This is not a good recipe for concessions, even if China is hurt more than the United States by a trade war.
Because that's what would happen -- Beijing would immediately respond with its own retaliatory tariffs on U.S. imports. They would likely harass U.S. companies with significant amounts of FDI in China. These moves would hurt China a little, but hurt the United States more. Like Michael Pettis, I think the chance of a full-blown trade war at this point becomes pretty high.
Krugman's assumption that Europe would automatically follow suit without prior consultation seems awfully casual. As the New York Times reported today, there are a lot of European companies that are not thrilled with volatility in the value of the euro -- and what Krugman is proposing is guaranteed to increase volatility. European authorities might prioritize bolstering the EU's reputation as an actor that doesn't violate multilateral norms over the economic issues at stake (and if you think that materialist explanations always trump arguments about political prestige, well, then, the euro should never have been created in the first place). I'm not sure how keen the Europeans will be about the unilateral move Krugman is suggesting. It's far from guaranteed that the EU would even be able to speak with a single voice on the issue.
Krugman's ignorance about how Japan would react (to be fair, Japan is not the easiest read right now), and his omission to mention how the rest of the G-20 or ASEAN would respond, suggests that he really hasn't thought this all the way through. I'd like to see some contingency planning in case the rest of the world doesn't line up the way he thinks.
Finally, there's no discussion -- none -- about what the political and economic effects would be during the period of uncertainty and/or if China decided they weren't going to acquiesce. Let's keep this within the economic realm and consider the following question: what's the effect of political uncertainty on investment behavior? Consumption levels? I would posit that it would increase risk-averse behavior -- particularly if this kind of trade war roiled financial markets. Wouldn't this simply exacerbate the liquidity trap concerns that Krugman has been fretting about?
Note that much of the last paragraph was framed in the form of questions. I'm not sure my answers are correct -- but I'm really not sure that Krugman's assertions/assumptions are correct.
So I see Paul Krugman has thrown his lot in with the neoconservatives who disdain multilateral institutions and prefer bellicose unilateralism when they confront a frustrating international situation.
His op-ed today is about China's currency manipulation. ... again. After explaining that China has less leverage than is commonly understood on the foreign economic policy front (gee, where have I heard that before), he closes with the following:
In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.
Whoa there, big fella!! That's a nice but very selective reading of international economic history you have there.
It's certainly true that the dollar was overvalued back in 1971. What Krugman forgets to mention -- and see if this sounds familiar -- is that the Johnson and Nixon administrations contributed to this problem via a guns-and-butter fiscal policy. They pursued the Vietnam War, approved massive increases in social spending, and refused to raise taxes to pay for it. This macroeconomic policy created inflationary expectations and a "dollar glut." Foreign exchange markets to expect the dollar to depreciate over time. Other countries intervened to maintain the dollar's value -- not because they wanted to, but because they were complying with the Bretton Woods system of fixed exchange rates. Nixon only went off the dollar after the British Treasury came to the U.S. and wanted to convert all their dollar holdings into gold.
In other words, the United States was the rogue economic actor in 1971 -- not Japan or Germany.
So, how about acting multilaterally first before engaging in unilateral action that alienates America's friends and allies alike?
To be fair to Krugman, many of the multilateral processes appear to be stymied, as Keith Bradsher explains in this NYT front-pager:
Beijing has worked to suppress a series of I.M.F. reports since 2007 documenting how the country has substantially undervalued its currency, the renminbi, said three people with detailed knowledge of China’s actions....
Last September, Presidennt Obama, President Hu Jintao of China and other leaders of the Group of 20 industrialized and developing countries agreed in Pittsburgh that all the G-20 countries would begin sharing their economic plans by November. The goal was to coordinate their exits from stimulus programs and prevent the world from lurching from recession straight into inflation.
The G-20 leaders agreed that the I.M.F. would act as intermediary.
But two people familiar with China’s response said that the Chinese government missed the November deadline and then submitted a vague document containing mostly historical data. These people said that China feared giving ammunition to critics of its currency policies at the monetary fund and beyond. Both people asked for anonymity because of China’s attitudes about its economic policies.
That last part oabout the G-20 process is particularly disturbing, given that this was supposed to be the venue through which macroeconomic imbalances were supposed to be addressed. So maybe Krugman is right and unilateral is the way to go?
I don't think so. The big difference between the end of the Bretton Woods era and the current Bretton Woods II situation is the distribution of interests. In 1971, everyone was opposed to a continuation of U.S. policies. This time around, there appears to be a growing consensus that China is the rogue economic actor.
If Krugman gets to repeat himself, then so do I:
[T]he United States is not the country that's hurt the most by this tactic. It's the rest of the world -- particularly Europe and the Pacific Rim -- that are getting royally screwed by China's policy. These countries are seeing their currencies appreciating against both the dollar and the renminbi, which means their products are less competitive in the U.S. market compared to domestic production and Chinese exports.
So why should the U.S. act unilaterally? Why not activate an international regime that does not include China but does include a lot of other actors hurt by China's currency policy?
Am I missing anything?
MIKE CLARKE/AFP/Getty Images
The Financial Times' indefatigable Goeff Dyer has an excellent story about Israel's efforts to lobby Beijing to take a tougher line on Iran. Actually, that's really just the news peg for a story about the myriad ways in which Beijing is becoming enmeshed in Middle East politics:
Beijing... has to weigh up a growing web of other interests in the Middle East which could have some influence on its approach to sanctions.
Indeed, parts of the foreign policy establishment in China are warning that it would be against the government’s interests in the Middle East to get too close to Iran.
China should not “undertake to please Iran and at the same time hurt the feelings of the Arabs and other countries,” said Yin Gang, a Chinese expert on the Middle East in a recent article.
Israel is part of that web of interests. Although China has taken a pro-Palestinian position in international forums and is critical of Israel’s nuclear capability,Beijing has over the years had an unusually close relationship with Israel, which has been a key military supplier.
“The relationship with Israel is an important one,” says Willem van Kemenade, a China analyst who has written a book on Iran’s relations with China....
According to diplomats, Beijing has been quietly lobbied by Saudi Arabia, which has been its biggest supplier of oil for most of the past decade and which has warned of the dangers a nuclear Iran would pose to Middle East stability.
Chinese analysts admit that a nuclear arms race in the Middle East could pose a risk to its energy security.
Yet China has interests in Iran that go beyond energy investments.
Chinese scholars mention that China’s own nuclear weapons capability was achieved in the face of western sanctions. Chinese leaders share with Iran a suspicion of what they regard as western interference in their domestic politics.
Many Chinese observers consider the unrest in Iran to be partly inspired by US interests. China also sees Iran as a future partner in a Middle East in which the US is less dominant....
There is also the added question of China’s Muslim population. After the riots in Xinjiang last summer, China was criticised for its treatment of its Uighur minority by Turkey and by two Iranian ayatollahs.
Given how sensitive Beijing is about political radicalisation of Muslims in Xinjiang by people outside the country, “the incident was a warning to Beijing that it must exercise caution when dealing with Iran’s political and religious elites”, according to a recent report by the International Crisis Group.
So, just to review:
1) China is cozying up to a powerful country on the periphery of the Middle East;
2) Because of its religion and periodically bellicose foreign policy, that country is viewed as an outsider by the Arab Middle East;
3) This country is pursuing internal security policies that would generously be described as "controversial" by the rest of the world;
4) It's Middle East policy can have pronounced effects on China's own domestic politics;
5) All the while, Chinese energy dependence on the region is increasing rapidly.
Welcome to the Middle East, China!!
For those three readers not transfixed by today's Healthcareapalooza: your humble blogger is in Washington, DC today to
talk China-watchers down off the ledge testify before the U.S.-China Economic and Security Review Commission. I'll post a link to the actual testimony once it's online. UPDATE: here's a link to everyone's testimony.
As is standard in these settings, I'm pretty sure I'm the least qualified person on the expert list.
James Vreeland, international political economy (IPE) scholar extraordinaire, has started a blog -- the Vreelander. James is one of the sharpest tools in the IPE shed, so it's to the good that he's started blogging (longtime readers might remember this guest post from last year).
I, for one, would like to officially welcome my good friend to the blogosphere by questioning his political sanity.
Last week he blogged about the Dalai Lama's meeting with Obama -- a fact that displeased Vreeland to no end:
President Obama is planning to meet with the Dali Lama at the White House. This is terrible. He is the spiritual leader of Tibet, an advocate for autonomy from China, and the head of the Tibetan government-in-exile. And the visit with Obama implies a tacit US endorsement that will deeply offend the Chinese government, not to mention many of the Chinese people.
Right now we need close cooperation with China to address serious global issues ranging from the economic crisis, to the environment, and even global security.
Meeting with the Dali Lama is a major affront to Beijing and to many Chinese. They consider this an issue of national sovereignty....
China is a multi-cultural, multi-ethnic, and multi-lingual country. It has to deal with some problems similar to those of the United States. The path is long, circuitous and difficult. And having the leader of a rival power meet with a head of government-in-exile doesn't help.
More importantly, we've got bigger issues to deal with regarding China. Rather than meet with the Dali Lama, Obama should be talking about Chinese currency revaluation. And he should be doing so on a daily basis. Leave China's sovereignty alone.
Oh, please. First of all, the U.S. can't "leave China's sovereignty alone," unless we're also prepared to jettison the 1979 Taiwan Relations Act and fail to mention China's Internet restrictions. That's clearly not going to happen. Meeting with the Dalai Lama, in comparison to sending arms to Taiwan, seems pretty tame.
It's also pretty routine, as CSIS's Charles Freeman pointed out. He also provided some useful context:
Presidents George H.W. Bush, Bill Clinton, and George W. Bush have all met with the Dalai Lama. Indeed, an express refusal to meet with the Dalai Lama would not only stray from established principle but would engender a raft of criticism from Congress and human rights groups that might constrain the president’s efforts to conduct a China policy that emphasizes engagement and cooperation.
And this is the thing -- foreign policies are never crafted with a clean slate, even with a change in presidential administrations. If no president had ever met with the Dalai Lama before and then Obama bumped into him in the Map Room, that sends one signal. If every president for two decades met with the Dalai Lama and then Obama abstains from meeting him -- let's call this the Vreeland Gambit -- that sends another signal.
I understand Vreeland's concerns that Tibet will gum up the foreign economic policy works, but I also know that the signal Obama would have sent by canceling this meeting would not have been a good one.
I would interpret this is a massive exercise in (oh, the irony) kabuki politics. Obama has a meeting that leads to no real policy differences, and China gets visibly upset and the inconsequential meeting. A week from now, neither side's rhetoric on this issue will matter all that much.
While I'm ISAing, check out my article "Uncle Sam vs the Dragon" in the latest issue of The Spectator (U.K.). It compares the recent Sino-American contretemps to the Cold War. I argue that there actually are some decent parallels, but not necessarily the ones you'd expect. My closing graf:
In the Cold War, moments of brinksmanship caused both countries to back away from the precipice. It is possible that, as tensions between China and America mount, nervous chauvinism — in the form of economic nationalism, bureaucratic rivalries or Congressional stupidity — might trigger a cascade of misguided actions and cause a damaging conflict. We can hope that politicians in Beijing and Washington will learn the right lessons from history. But we can expect plenty more tension as Uncle Sam and the Dragon settle down together.
Over at the German Marshall Fund's blog, Andrew Small articulates an interesting thought on the recent spot of trouble between China and the west:
The mood on China in Western capitals is beginning to darken. From cyber-attacks to obstinacy in Copenhagen, Beijing’s assertiveness and the hardening tone of its diplomacy are prompting a rethink. If the competitive aspects of the relationship with China are going to dominate in the years ahead, have the United States and Europe got their strategies right? And if not, what are the options?....
Many Western officials believe, however, that China has miscalculated — and is shooting itself in the foot. Talk of giving Beijing more space on sensitive issues has evaporated. Support from business lobbies has weakened. Heads of government who would happily push China into the “important but not urgent” file have begun to review their strategies.
Already, Beijing is feeling the effects of this pushback. Recent weeks have seen the announcement of arms sales to Taiwan, confirmation of a U.S. presidential meeting with the Dalai Lama, and public criticism from President Obama and Secretary Clinton of China’s currency policies and its stance on the Iranian nuclear issue. The West hopes China will realize it has overplayed its hand and will make some conciliatory moves — such as a modest revaluation of the yuan and acquiescence to tougher sanctions on Iran — to reverse the political dynamic. For all the noise in the last week, Washington has made only a modest tactical shift. But the United States and Europe may yet see this as a wake-up call and make a more serious set of changes to their China policies.
Indeed, for all the wailing about how America can't commit to certain policies for fear of angering the Chinese, the United States seems to be doing whatever it wants. Hmm.... that sounds familiar.
As I keep saying in this space, China is a rising power, but they're still not in the same league as either the United States or the European Union in terms of material wealth, military infrastructure, or soft power. Joshua Kurlantzick provided a concise summary of this point in yesterday's Boston Globe which is worth reading.
The question I have is whether any of this will matter. My hunch is that China's various actions play well domestically -- and that has top priority for Beijing's leaders. China is not a superpower, but it is still powerful enough to "go it alone" if it so chooses on a number of policy dimensions.
Question to readers: will the U.S. and China continue to pursue the status quo, or will they respond to each other's actions by dialing the conflict down?
Over at Reason, Ron Bailey offers an intriguing solution to one of these problems -- use the WTO as a crowbar to bring down the Great Firewall of China:
When China joined the World Trade Organization (WTO) in 2001 it agreed that foreign service companies would have the same access to markets in China as domestic companies do. Now the European Union and the U.S. Trade Representative office are considering an argument that the Great Firewall violates China’s obligations to permit free trade in services under its agreements with the WTO. Last year, in a working paper titled Protectionism Online: Internet Censorship and International Trade Law, the European Centre for International Political Economy (ECIPE) think tank argued that “WTO member states are legally obliged to permit an unrestricted supply of crossborder Internet services.”
Since 2007, the California First Amendment Coalition (CFAC) has been pushing the U.S. Trade Representative to file a case against China on the grounds that it has been violating its WTO obligations. CFAC argues that, among other violations, China discriminates against foreign suppliers of Internet services by blocking them at the border while allowing domestic suppliers to offer like services. In addition, China has violated its commitments not to introduce or apply non-tariff measures when it joined the WTO by blocking a number of imported products without explanation or justification. China has also not set up any administrative procedures through which foreign suppliers of online services could appeal the blocking of imported publications and content.
I'll defer to smarter law blogs for correction, but I really don't think this is going to work. First, I'm not sure the differences in national treatment are great enough to constitute a WTO violation (remember, the Chinese position on the Google controversy is that Google has to obey Chinese laws, which appply to both domestic and foreign search engines). Second, China can respond not by lifting the Great Firewall, but by setting up administrative procedures to handle complaints. Third, as Bailey acknowledges, if China were to lose such a case, one option would be to simply refuse to comply. The U.S. would be allowed to respond with trade sanctions, but I suspect China's government will take that bargain every day of the week and twice on Sundays.
Simon Lester suggests that a bilateral investment treaty (BIT) would be a more useful crowbar -- which is great, except the U.S. and China don't have one. A BIT is being negotiated, and some experts are optimistic that it will be completed by this summer. Call me crazy, but I can't see the Chinese government negotiating anything that would affect their ability to censor.
Am I missing something?
Blake Hounshell highlights a tidbit from Henry Paulson's new memoir that caught my attention as well. According to Paulson, in the summer of 2008 Russia approached China to sell off their Fannie Mae and Freddie Mac debt. This merited stories from Bloomberg and the Financial Times. According to the FT:
Russia proposed to China that the two nations should sell Fannie Mae and Freddie Mac bonds in 2008 to force the US government to bail out the giant mortgage-finance companies, former US Treasury secretary Hank Paulson has claimed....
Mr Paulson said that he was told about the Russian plan when he was in Beijing for the Olympics in August 2008. Russia had gone to war with Georgia, a US ally, on August 8.
“Russian officials had made a top-level approach to the Chinese, suggesting that together they might sell big chunks of their GSE holdings to force the US to use its emergency authorities to prop up these companies,” he said.
Fannie and Freddie are known as GSEs or government sponsored enterprises.
“The Chinese had declined to go along with the disruptive scheme, but the report was deeply troubling,” he said. A senior Russian official told the Financial Times that he could not comment on the allegation.
The Russians deny the story in the Bloomberg story, but Ashby Monk points out the possible implications:
Paulson’s report is pretty amazing. If true, it would appear that Russia was plotting economic warfare against the US during the summer of 2008; I don’t really know what else to call it. Their intention was to use their sovereign wealth to purposely weaken and damage the US economy. The fact that all this apparently occurred around the same time that Russia was engaged in a traditional war with Georgia, a US ally, lends some credibility to the idea.
This revelation–while unconfirmed–will not comfort those in the West that fear SWFs; it doesn’t help anybody if these funds are seen to be potential weapons of economic destruction…
Let's assume this is true for the sake of making life interesting. There's still a few more pieces of data I'd like to have before drawing conclusions.
Monk assumes that the Russians did this for geopoltical reasons. If memory serves, however, China and Russia were both concerned about protecting the value of their GSE debt. Forcing the U.S. government to intervene would have helped protect their remaining holdings. So this might have been an entirely commercial gambit.
Second, this really isn't about sovereign wealth funds per se but about official holdings of U.S. debt and equities. Some people think this is a real problem -- others don't. Readers should provide their thoughts in the comments.
Third, the fact that the Russians thought the Chinese would go along with them on this says a lot about the delusions Russian leaders had during the Russian-Georgian conflict. They really seem to have believed that China, other members of the Shanghai Cooperation Organization, and the rest of the Collective Security Treaty Organization would be perfectly cool with Russia recognizing the independence of two secessionist states -- just because it would be an affront to the U.S.A. Whoops.
This raises my provocative but closing point -- that the Russian-Georgian war might have been the best thing that could have happened for the bilateral relationship. Despite all the doomsaying at the time, the conflict -- combined with Great Recession -- had a modest humbling effect on Russian ambitions. The commodity bubble - which had fuelled Russia's economic growth and self-confidence for the past decade - popped in the summer of 2008. The recognition of Abkhazia and South Ossetia abetted a capital outflow that had begun in reaction to the Russian government's heavy-handedness in picking winners and losers in the domestic economy. These trends, if nothing else, likely highlighted the opportunity costs of continued bellicosity to Russian elites and Russian policymakers.
At the same time, the invasion itself provided a moment of clarity to U.S. policymakers about the precise limits of their influence when dealing with balky republics in the Caucasus. Even as a candidate, Obama articulated a "realist internationalist" position towards the Russian Federation. This approach recognizes Russia's great power status and the utility of a great power concert in dealing with global trouble spots. Rather than prioritizing human rights, democratization, or even economic interests in the bilateral relationship, this policy position prioritizes great power cooperation on matters of high politics, such as nuclear nonproliferation and the containment of rogue states that transgress global norms.
You can argue about the priorities, but on the whole I think this policy has worked. The war allowed both sides to confront the costs of continuing down a very negative trajectory. They both stepped away from the brink.
This is worth thinking about whem mulling over a different bilateral relationship that's had a bad few months.
In light of Secretary of State Hillary Clinton's big Internet freedom speech this AM, I thought it would be a good idea to get a handle on how China is playing this whole Google controversy.
Well, according to the New York Times, it appears that China is downplaying l'affaire Google as a minor matter about business regulation:
The Chinese government is taking a cautious approach to the dispute with Google, treating the conflict as a business dispute that requires commercial negotiations and not a political matter that could affect relations with the United States.
Officials were caught off guard by Google’s move, and they want to avoid the issue’s becoming a referendum among Chinese liberals and foreign companies on the Chinese government’s Internet censorship policies, say people who have spoken to officials here. There have been no public attacks on Google from senior officials or formal editorials in the newspaper People's Daily, the Communist Party’s mouthpiece.
Well, that settles that, I guess.... zzzz.... wait, what's with this Financial Times article by Kathrin Hille I'm seeing?
China has signalled a change of approach to the Google crisis, with state media describing the company’s threat to pull out of the country as a political conspiracy by the US government.
Accusations in two newspapers that Washington was using Google as a foreign policy tool were echoed by Chinese government officials on Wednesday....
Global Times, a nationalist tabloid owned by People’s Daily, the Communist party mouthpiece, ran an editorial with the headline: “The world does not welcome the White House’s Google”.
“Whenever the US government demands it, Google can easily become a convenient tool for promoting the US government’s political will and values abroad. And actually the US government is willing to do so,” the piece said.
In an accompanying news story, the paper quoted Wu Xinbo, a political scientist at Fudan University, as saying “the Google incident is not just a commercial incident, it is a political incident”.
NOOO... cognitive complexity!! Run away!! Run away!!!
Actually, it's not that complex. Indeed, this climactic clip from Chinatown (oh, the irony) addresses this question metaphorically, without the yucky incest factor. This is a public and a private sector dispute. Marc Ambinder's useful tock-tock on events from the U.S. side of things make this clear enough (also, check out this webcast featuring FP's own Evgeny Morozov, as well as this FAQ on the controversy).
The interesting question is what will happen over time. Usually, public-private disputes don't stay that way -- they go for "corner solutions." Either the private sector finds an accommodation with the host government (access to Japanese markets, for example), or the business controversy gets subsumed by high politics (Dubai Ports World).
Question to readers: which way do you think the Google-China feud will go?
So, you might have heard that Google is having a spot of trouble in China -- and is threatening to pull out of the Middle Kingdom altogether.
Both FP's Evgeny Morozov and Jack Shafer suggest that Google isn't just doing this out of the goodness of their heart -- they have to be doing it because their market share is eroding to Baidu and this is the way to deflect with dignity. Today's stock market suggests that they might have a point.
The thing is, a 33% share (and possibly rising) in that market is not a trivial amount of dollars. An estimated $600 million in cabbage is not easy to walk away from. A true cynic would have predicted that Google would have kept its mouth shut, taken its lumps, and still tried to outcompete Baidu. Google didn't.
The New York Times's Keith Bradsher and David Barboza make a more intriguing argument -- the Chinese government is making life increasingly miserable for Western multinationals:
Google is far from alone among Western companies in its growing unhappiness with Chinese government policies, although it is highly unusual in threatening to pull out of the country entirely in protest.
Western companies contend that they face a lengthening list of obstacles to doing business in China, from “buy Chinese” government procurement policies and growing restrictions on foreign investments to widespread counterfeiting.
These barriers generally fall into two broad categories. Some relate to China’s desire to maintain control over internal dissent. Others involve its efforts to become internationally competitive in as many industries as possible.
Then there's this from the Wall Street Journal's Ian Johnson and Jason Dean:
The Google syndrome caps growing complaints by foreign businesses over a deteriorating business environment. Both the European Chamber and the U.S. Chamber of Commerce in China have issued reports sharply critical of China's business environment. During the 1980s and '90s, foreign businesses were assiduously courted by China's leaders and responded by bringing to China technology, training and international best practices.
In recent years, however, foreign businesses have complained that the official line has shifted. Younger bureaucrats are more nationalistic and skeptical of the value of letting in foreign companies, [head of the European Chamber of Commerce in China Jörg ] Wuttke says. Last year, for example, foreign executives said bidding practices for wind energy were rigged to exclude foreign companies.
"There's a general attitude in the foreign business community that it's getting tougher to do business here," said James McGregor, a senior counselor at APCO Worldwide and author of a book on doing business in China. "This could be a bellwether."
Not all Western multinationals feel this way. Still, this raises a question I find most interesting -- how much of what China is doing is intentional and how much of it is a PR cluster f**k?
I can see it going either way. China is definitely more powerful than it used to be, and maybe they've been drinking the Robert Fogel kool-aid. Greater power usually leads to greater nationalist pride, so I can kinda sorta see this being a conscious strategy by Beijing to throw its weight around.
The thing is, it's a remarkably clumsy effort. Consider James Fallows on this point:
In a strange and striking way there is an inversion of recent Chinese and U.S. roles. In the switch from George W. Bush to Barack Obama, the U.S. went from a president much of the world saw as deliberately antagonizing them to a president whose Nobel Prize reflected (perhaps desperate) gratitude at his efforts at conciliation. China, by contrast, seems to be entering its Bush-Cheney era.
China could be throwing its weight around -- or it's bureaucrats could be much less cohesive than outside observers believe.
Your humble blogger has been suffering from
the Mother of All Stomach Viruses a small medical malady for the last few days, and will be recuperating for the next few. This is unfortunate. There's been a lot of very interesting stuff in the blogosphere about the future of the global political economy -- and I haven't had the energy to write about it.
That doesn't mean I can't link to it, however. Sooo...... I would suggest that you read the following:
1. Jim Manzi's essay on "Keeping America's Edge" in National Affairs -- and the plethora of blog critiques/responses to it. My partial take on this can be seen in this bloggingheads diavlog I had with Henry Farrell right before
this demon virus possessed my GI tract I fell under the weather.
2. Roger Cohen on the recent downturn in the Sino-American relationship;
3. James Fallows on "How America Can Rise Again" in The Atlantic.
4. Rachel Sanderson and Brooke Masters's FT story on how the Basle Committee on Banking Supervision is taking the International Accounting Standards Board to task. Hey, wake up!! Seriously, this is one of those stories about the plumbing of the global financial system that bears watching.
5. Stephen Cohen and Brad DeLong's The End of Influence: What Happens When Other Countries Have the Money. As a review of the neoliberal project and how we got to where we are today, I find it very interesting. As a treatise on what's going to happen now, I'm
wishing they'd talked to a few more political scientists unconvinced.
In short, it's a great time to be studying the global political economy -- now all I have to do is be well enough to writer about it.
I hope to address some of these issues over the weekend -- but for now, I'm going to take Count Rugen's advice.
In the meanwhile, go forth and read, and report back your thoughts.
Lost in the Nobel hoopla yesterday was this fascinating New York Times story by Michael Wines about the ways in which China's economy and foreign economic policy are vexing its neighbors.
China has long claimed to be just another developing nation, even as its economic power far outstripped that of any other emerging country.
Now, it is finding it harder to cast itself as a friendly alternative to an imperious American superpower. For many in Asia, it is the new colossus.
“China 10 years ago is totally different with China now,” said Ansari Bukhari, who oversees metals, machinery and other crucial sectors for Indonesia’s Ministry of Industry. “They are stronger and bigger than other countries. Why do we have to give them preference?”
To varying degrees, others are voicing the same complaint. Take the 10 Southeast Asian nations in the Association of Southeast Asian Nations, known as Asean, a regional economic bloc representing about 600 million people. After a decade of trade surpluses with Asean nations that ran as high as $20 billion, the surplus through October totaled a bare $535 million, according to Chinese customs figures, and appears headed toward a 10-year low. That is prompting some rethinking of the conventional wisdom that China’s rise is a windfall for the whole neighborhood.
Vietnam just devalued its currency by 5 percent, to keep it competitive with China. In Thailand, manufacturers are grousing openly about their inability to match Chinese prices. India has filed a sheaf of unfair-trade complaints against China this year covering everything from I-beams to coated paper.
Read the whole thing -- Wines does a nice job of contrasting China's policy responses in 2008 to what it did a decade earlier. To sum up: those dogs that were not barking previously are starting to growl.
This problem is not going away anytime in the near future. The problem for the rest of the Asia/Pacific is that their comparative advantages (labor costs, process innovations) are also China's comparative advantages. Unless China starts acting as an important consumer market as well -- which admittedly might be happening as I type this -- then China's mantra of being a "responsible power" is going to meet a greater level of static very, very soon.
UPDATE: The Chicago Council on Global Affairs' Tom Wright has a report on how the financial crisis has affected China's soft power in the Asia/Pacific region that buttresses the Wines story.
So, Pew has a new survey of elite and mass attitudes about foreign policy, and it's chock-full of interesting results. Turns out Americans sound pretty realist right now:
In the midst of two wars abroad and a sour economy at home, there has been a sharp rise in isolationist sentiment among the public. For the first time in more than 40 years of polling, a plurality (49%) says the United States should "mind its own business internationally" and let other countries get along the best they can on their own....
The public sees China's emerging power as more worrisome than do the foreign policy opinion leaders. There has been virtually no change since 2005 in the percentage of the public saying that China represents a major threat to the United States (53% today, 52% then). Moreover, while Iran is mentioned most often as the country that poses the greatest danger to the United States, China continues to rank among the countries frequently named by the public as dangers to the U.S....
At the same time, there has been a rise in unilateralist sentiment. Fully 44% say that because the United States "is the most powerful nation in the world, we should go our own way in international matters, not worrying about whether other countries agree with us or not." That is by far the highest percentage agreeing since the question was first asked by Gallup in 1964.
Hmmm... this sounds familiar.
Now, you might think supporters of these policy positions would be overjoyed at this news, or at least extoling the sage wisdom of the common folk of America.
The thing is, there are other results in this survey suggesting the public is kinda, sorta stupid*:
In a reversal of opinion from the beginning of last year, 44% of the public now says China is the world's leading economic power, while just 27% name the United States. In February 2008, 41% said the U.S. was the top economic power while 30% said China.
Now I understand that China's relative power has grown vis-a-vis the United States in the past
year two years decade. Maybe in a decade or so, China will be the more powerful and robust economy. Maybe. Right now, however, there is simply no way you can describe China right now as "the world's leading economic power."
If you were to take a snapshot of the distribution of economic capabilities in the world, then the United States remains the most powerful country in the world, and it's not close. The U.S. share of the global economy has hovered around 25% for the past decade. This is twice the size of China or Japan, and far larger than that of any other individual nation-state. Any measure of science and technology outputs generally has the United States coming out on top. Historically, the U.S. is not only the current hegemon - the country controls a far greater share of the world's resources than most great powers of the past. [But, but, but, China has the largest amount of official currency reserves in the world!!--ed. Yes, and a fat lot of good that does Beijing.]
Is China more economically powerful than it was in 2008? Absolutely. Is it more powerful than the United States? No f***ing way.
There's a lot more to dig through here -- I'll be bashing the inconsitencies of foreign policy elites sometime this weekend. But I highlight these results to suggest that anyone talking about this stuff as an example of the "wisdom of crowds" does not know what they are talking about. These are very interesting results, but they're based on a pretty high degree of ignorance about world politics.
*Yes, the more accurate word to use would be "uninformed," but I'm trying to provoke here.
Apparently the Chinese premier feels like everyone is picking on his country and that's not fair:
China’s premier Wen Jiabao on Monday lashed out at the growing number of countries pressuring Beijing to strengthen its currency, making it clear that European officials made little headway in their efforts over the past two days to persuade the country to allow the renminbi to appreciate.
Speaking at the conclusion of an EU-China summit in the eastern Chinese city of Nanjing, Mr Wen said: “Some countries on the one hand want the renminbi to appreciate, but on the other hand engage in brazen trade protectionism against China. This is unfair. Their measures are a restriction on China’s development.” (emphasis added)
Wen has a legitimate complaint here about the rise in protectionism directed against China in particular. Of course, this begs the question of whether maybe, just maybe, the undervalued yuan might be driving some of that protectionist sentiment.
It would be interesting for the U.S. Trade Representative and the EU Trade Directorate to make the following proposal:
Hey, Wen, you're right about the unfair tire tariffs and the like. Let's make a trade deal: you allow the yuan to appreciate, say, 20% against the dollar over the next twelve months. In return, we will announce a voluntary two-year moratorium on any new anti-dumping and escape clause measures targeted against Chinese imports. What do you say?
To be honest, I'm not sure if this is legal, but it would be an interesting gambit.
Question to readers: which side would blink first at this deal?
It took me forty pages of pretty dense prose to explain why China's massive dollar holdings do not translate into increased foreign policy leverage.
Over the weekend, Saturday Night Live's cold open managed to summarize the subtleties of the Sino-American economic relationship in under seven minutes. Go ahead and watch it. I'll wait.
Note that, although it appears that President Hu has the power because he is repeatedly berating Obama, the content of the skit suggests otherwise. Hu's repeated complaints that the United States is, er, "doing sex" to him demonstrates the very limited leverage China has over U.S. policy.
My only complaint with the skit is that it fails to mention why China is buying up dollar-denominated assets in the first place.
In his New York Times column today, Paul Krugman writes about the problem of macroeconomic imbalances between China and the United States. Which is fine, except he wrote the exact same column last month. Just like last month's column, this one makes some good points and fails to mention some important dynamics. Beyond the inclusion of a useful footnote, however, there's nothing new here.
As part of an ongoing public service to busy readers of Foreignpolicy.com, the hard-working staff here at the blog is ready to help you bypass the chore of having to read the same Krugman column time and again with this handy-dandy crib sheet. My guess is that the next six months' worth of Krugman columns will boil down to the following assertions:
Now, let me stress that I agree with 1, 3, and 6 at this point, and I'm agnostic on 4 and 5, so it's not like Krugman is wrong in what he's saying. It's just that he's saying the same damn thing over and over again.
I'm late to this party, but two quick thoughts on Obama's Tokyo speech:
1. Last week a sharp foreign policy observer -- and a former campaign advisor for Obama -- made an interesing lexicographical observation to me about the Obama administration's foreign policy rhetoric to date. They use the word "partnership" a hell of a lot more often than they use the word "alliance." That's not terribly surprising, given their emphasis on talking with adversaries, forming great power concerts, etc. Still, there are times when it's important to reach out more to one's allies than one's rivals.
The Tokyo speech was one of those occasions, and I'm happy to report that Obama used "alliance" 12 times and "partnership" only 9 times. Perhaps this says more about the lay of the land in the Pacific Rim than anything else, but it does suggest that the adminstration is sensitive to regional nuances.
2. That said, I was underwhelmed with the trade outreach of the speech. Some reports suggest that Obama announced that the U.S. would join the Trans-Pacific Partnership, an APEC trade forum comprising, at the moment, of Brunei, Singapore, Chile and New Zealand (with Vietnam and Australia thinking about joining).
What Obama actually said, however, was:
The United States will also be engaging with the Trans-Pacific Partnership countries with the goal of shaping a regional agreement that will have broad-based membership and the high standards worthy of a 21st century trade agreement.
So what exactly does that mean? Helene Cooper points out the ambiguities of that language in the New York Times:
Although Mr. Obama did open the door during his speech in Tokyo on Asia policy, he did not explicitly say that the United States would join the pact. A formal announcement that the United States is beginning negotiations would undoubtedly kick off criticism from free-trade opponents in the United States and pushback from Congress.
Mr. Obama spoke, instead, of “engaging the Trans-Pacific Partnership countries with the goal of shaping a regional agreement that will have broad-based membership and the high standards worthy of a 21st century trade agreement.”
That line left many trade envoys already in Singapore scratching their heads: did Mr. Obama mean that the United States would begin formal talks to join the regional trade pact, which presently includes Singapore, Brunei and New Zealand, and could later include Vietnam — an addition that could lead to more Congressional pressure at home?
Many regional officials have been waiting for the United States to join the initiative as a demonstration that Washington will play a more active role in the region. But the Obama administration has yet to establish a firm trade policy, as it is still reviewing its options.
White House officials were not much clearer on what Mr. Obama meant when they were pressed on this after the speech. Michael Froman, an economics expert on the National Security Council, said that what Mr. Obama meant was that he would engage with the initiative “to see if this is something that could prove to be an important platform going further.”
Wow, that's some real enthusiasm coming from the G-20 sherpa.... not.
For an administration that likes to pride itself as savvy in the ways of foreign policy subtleties, I still don't think they grasp the fact that trade policy is now embedded into foreign policy in the Asia/Pacific Region.
My latest column in The National Interest online is up, and it sounds a warning about the Obama administration's policy malaise on both the Asia/Pacific region and the #1 issue to countries in the Asia/Pacific region -- namely, trade:
Obama’s policy malaise on trade will not win him friends in a region hell-bent on deepening economic integration. U.S. policy on trade liberalization has stalled out so badly that rumors are swirling around the Beltway that U.S. Trade Representative Ron Kirk is contemplating resignation. Meanwhile, countries in the region are signing free-trade agreements with each other at a record pace. The European Union has inked a free-trade deal with South Korea, and is negotiating one with Japan. In contrast, the chances of the Korea-United States free trade agreement passing this Congress is hovering around zero. The comparison with China is particularly dispiriting....
The United States has not been eclipsed yet—the bevy of activity in the Pacific Rim is a lot more about hedging than balancing against the United States. Nevertheless, if President Obama wants to be taken seriously in the region, he needs to take the region’s issues more seriously. Trade is not merely about economics—it’s about foreign policy too. Just because Washington ignores a policy issue does not mean others do not think it important. As we are learning, some regions can bypass America altogether if they so choose.
In a very disturbing sign of the times, I see that former State Department official Evan Feigenbaum has written something similar for the Financial Times:
[T]he business of Asia is business. Without more vigorous trade engagement, such diplomatic efforts cannot secure America’s position in a changing Asia. The US could soon face a region less willing to accommodate its commercial and financial interests.
Many eons ago in graduate school Only recently Evan and I woul talk about the Asia/Pacific when we were matriculating in graduate school together -- and, more often than not, we disagreed with one another. The only times we agreed was when some serious s**t was going down. So take this consensus for what you will.
The Financial Times' Edward Luce talks today about the ways in which U.S. perceptions of China have changed:
[N]o amount of dexterity can disguise the fact that Mr Obama’s visit to China crystallises a big shift in the global centre of gravity over the past few years. Just a decade ago Bill Clinton persuaded Capitol Hill that China’s membership of the World Trade Organisation would strengthen the forces of democracy within China.
Today, almost nobody in Washington even tries to make that case. Subsequent developments in China – and elsewhere – make it hard to sustain the argument that economic liberalisation leads necessarily to political liberty.
I'm not saying Luce doesn't have a point. China's been opening to the world for two decades now and Beijing's Freedom House score on accountability and public voice hasn't really budged (and stories like these don't help). So anyone who thinks that economic liberalization will lead to political liberalization in the short-term is fooling themselves.
That said, this isn't a short-term game that's being played. Freedom House also acknowledges that, "Even though political institutions in China have not undergone major change, the degree to which Chinese can manage their own lives has increased substantially in the reform era." Furthermore, as someone watching their foreign economic policy, I think it's safe to say that the current Chinese leadership is far more sensitive to domestic political pressures than was the case a decade ago (whether the Chinese public actually wants what Kantian liberals think they want is another matter entirely).
China might be one of the toughest tests imaginable on the relationship between economic and political liberalization. The country has a strong civilizational identity, but the leadership is acutely aware of the rebellious tendencies of some of its ethnic minorities. The population is so huge that even after decades of double-digit economic growth, a lot of Chinese citizens are dirt poor. It will likely take another decade for China's GDP per capita figure to rise to the level when most political science models would predict some push towards democratization.
I certainly don't think U.S. policymakers can sit around and wait for China to democratize as the answer to policy problems in the Pacific Rim. But neither am I convinced that China's domestic polity has reached its final steady state.
Following up on my dollar post from earlier this week, I see that Paul Krugman is talking a related issue in his New York Times column today -- the refusal of the renminbi to depreciate against the dollar:
Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China’s insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.
Although there has been a lot of doomsaying about the falling dollar, that decline is actually both natural and desirable. America needs a weaker dollar to help reduce its trade deficit, and it’s getting that weaker dollar as nervous investors, who flocked into the presumed safety of U.S. debt at the peak of the crisis, have started putting their money to work elsewhere.
But China has been keeping its currency pegged to the dollar — which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.
Krugman then goes on to excoriate the U.S. Treasury department for not upbraiding the Chinese more on this.
Fair enough, but the thing is, the United States is not the country that's hurt the most by this tactic. It's the rest of the world -- particularly Europe and the Pacific Rim -- that are getting royally screwed by China's policy. These countries are seeing their currencies appreciating against both the dollar and the renminbi, which means their products are less competitive in the U.S. market compared to domestic production and Chinese exports.
This leads to the title of this post. Krugman presumes that the U.S. has the strongest incentive to talk to China about this issue. If one thinks of the U.S. acting as the hegemon, that's possibly true. As a matter of direct economic interest, however, why haven't the Europeans and East Asians been screaming bloody murder about this? China's policies are forcing them to take actions they don't want to take -- so why aren't they complaining more loudly about this?
Your humble blogger has a rather long essay in the Fall 2009 issue of International Security. What's a lowly IPE scholar doing publishing in a high and mighty security journal? Assessing whether China's massive holdings of dollar-denominated assets is a big deal or not. The title may or may not give away my argument: "Bad Debts: Assessing China's Financial Influence in Great Power Politics."
Here's the abstract:
Commentators and policymakers have articulated growing concerns about U.S. dependence on China and other authoritarian capitalist states as a source of credit to fund the United States' trade and budget deficits. What are the security implications of China's creditor status? If Beijing or another sovereign creditor were to flex its financial muscles, would Washington buckle? The answer can be drawn from the existing literature on economic statecraft. An appraisal of the ability of creditor states to convert their financial power into political power suggests that the power of credit has been moderately exaggerated in policy circles. To use the argot of security studies, China's financial power increases its deterrent capabilities, but it has little effect on its compellence capabilities. China can use its financial power to resist U.S. entreaties, but it cannot coerce the United States into changing its policies. Financial power works best when a concert of creditors (or debtors) can be maintained. Two case studies—the contestation over regulating sovereign wealth funds and the protection of Chinese financial investments in the United States—demonstrate the constraints on China's financial power.
Read it and weep.
My latest column for Newsweek International is now available. It looks at optimistic and pessimistic modes of thought with regard to China's future, and suggests that they can both be right:
I belong to the third camp—the one that believes that the Bubblers and the Extrapolators can both be right. My camp looks at China and sees the parallels with America's rise to global economic greatness during the late 19th and early 20th centuries. From an outsider's vantage point, America looked like a machine that could take immigrants and raw materials and spit out manufactured goods at will. By 1890, the U.S. economy was the largest and most productive in the world. As any student of American history knows, however, these were hardly tranquil times for the United States. Immigration begat ethnic tensions in urban areas. The shift from an agrarian to an industrial economy led to fierce and occasionally violent battles between laborers, farmers, and owners of capital. With an immature financial sector, recession and depressions racked the American economy for decades.
It is not contradictory for China to amass a larger share of wealth and power while still suffering from severe domestic vulnerabilities. From the perspective of the rest of the world, however, this is not a good thing.
As for why it's not a good thing, well, you'll have to read the whole article.
When the Obama administraton announced the decision to slap a 35% tariff on Chinese tire imports, I was pretty sure that free traders would be incensed. And I haven't been disappointed -- even the financial markets are freaking out over this one.
We trade enthusiasts are an excitable lot, however, what with everything leading to the falling off of cliffs, crossroads being reached, and red zones being breached. Seven years ago, the allegedly free-trade Bush administration imposed steel tariffs that were found to be WTO-inconsistent. There was a lot of gnashing of teeth and wailing at the time about the end of the open economy as we knew it -- yet the world trade system proved to be pretty robust. So maybe my trade compatriots are exaggerating things a wee bit, yes? In all likelihood, won't this be resolved via the WTO dispute settlement mechanism about 18 months from now?
For the first eight months of the Obama administration, I've been resisting the urge to shout "protectionism" at the drop of the hat. This time, however, there are four reasons why I'm feeling much more nervous:
1) This isn't your garden-variety protectionism. Last month, Chad Bown explained the Financial Times why this decision was a very special kind of protectionism:
[A] little-known loophole in the rules governing China’s 2001 WTO accession makes it easy for a global protectionist response to spread faster and further than that which took hold in 2002. Nowadays, once any one country imposes a China safeguard on imports, all other WTO members can immediately follow suit, without investigating whether their own industries have been injured.
So this trade dispute can metastasize more quickly than most.
2) Beijing is not lying down on this. China's furious and swift reaction points to another problem: the United States is not the only country feeling protectionist urges at the moment. Economic nationalism in China is riding quite high at the moment, as Keith Bradsher suggests in the New York Times:
The Chinese government’s strong countermove followed a weekend of nationalistic vitriol against the United States on Chinese Web sites in response to the tire tariff. “The U.S. is shameless!” said one posting, while another called on the Chinese government to sell all of its huge holdings of Treasury bonds....
China had initially issued a fairly formulaic criticism of the tire dispute Saturday. But rising nationalism in China is making it harder for Chinese officials to gloss over American criticism.
“All kinds of policymaking, not just trade policy, is increasingly reactive to Internet opinion,” said Victor Shih, a Northwestern University specialist in economic policy formulation.
Methinks Shih and Bradsher are exaggerating things a wee bit -- imagine for a moment if U.S. foreign policy was driven by people getting upset on the Internet -- but you get the point.
The U.S. use of this provision is doubly troubling, because from Beijing's perspective their WTO accession negotiations were seen as a humiliating kowtow to the power of the West. China is not going to be selling its bonds anytime soon, but Beijing has not quite mastered how to cope with these kinds of domestic pressures, so they could do something really, really stupid.
3) Politically, Obama has boxed himself in. As egregious as the Bush steel tariffs were, they were targeted at a sector and not a country. Furthermore, the Bush administration responded to the hubbub very quickly by watering down the worst effect of the tariffs.
The Obama administration's new tariff is expressly directed at China. And I'm not saying that China is blameless here. But because it's country-specific, the administration has less room to maneuver -- either the tariffs are applied against China or they aren't. It can't walk this back without it looking like a flip-flop. Which means that there's little room for concession or negotiation.
4) Obama's base scares me on trade. When the Bush administration did what it did, it was fulfilling a campaign promise to the state of West Virginia steelwokers. Fortunately, the rest of Bush's winning political coalition was not seeking trade relief. So the protectionist instinct pretty much ended with the steel tariffs -- and everyone in the Bush administration knew that they'd be overturned by the WTO eventually.
With the Obama administration, however, this feels like the tip of the iceberg. Most of Obama's core constituencies want greater levels of trade protection for one reason (improving labor standards) or another (protecting union jobs). This isn't going to stop. "Trade enforcement" has been part and parcel of Obama's trade rhetoric since the campaign. The idea that better trade enforcement will correct the trade deficit, however, is pure fantasy. It belongs in the Department of Hoary Political Promises, like, "We'll balance the budget by cracking down on tax cheats!" or "By cutting taxes I can raise government revenues!" It. Can't. Happen.
If I knew this was where the Obama administration would stop with this sort of nonsense, I'd feel a bit queasy but chalk it up to routine trade politics. When I look at Obama's base, however, quasiness starts turning into true nausea.
Developing.... in a very, very scary way.
In a legen -- wait for it -- dary blog post, Belle Waring mentioned the pony problem in public policy. Namely, "an infallible way to improve any public policy wishes. You just wish for the thing, plus, wish that everyone would have their own pony!"
I bring this up because of David Sanger's New York Times story about the prospects of imposing a gasoline embargo on Iran:
The Obama administration is talking with allies and Congress about the possibility of imposing an extreme economic sanction against Iran if it fails to respond to President Obama's offer to negotiate on its nuclear program: cutting off the country’s imports of gasoline and other refined oil products....
But enforcing what would amount to a gasoline embargo has long been considered risky and extremely difficult; it would require the participation of Russia and China, among others that profit from trade with Iran. Iran has threatened to respond by cutting off oil exports and closing shipping traffic through the Strait of Hormuz, at a moment that the world economy is highly vulnerable.
The rest of the story is kind of irrelevant -- because without China and Russia, this is just a theoretical exercise. In fact, here's a good time-saver: if you read any story about a gasoline embargo o Iran, just scan quickly and get to the part where the reporter explains how and why Russia and China would go along. If it's not mentioned, the story is inconsequential.
If you want China and Russia to agree to sanctions, should you wish for the free pony as well? Here the growth of dissent in Iran complicates an already complicated picture. I'm betting that Moscow and Beijing have observed the "Death to Russia!" and "Death to China!" chants among the protestors. This is likely going to make them even more reluctant to do anything that undermines the current regime (even if this hurts their long-term interests). Which a gasoline embargo would most certainly do.
Do I think a gasoline embargo is a good idea? Absolutely. Do I think it will happen? No, I don't.
This bit from the Los Angeles Times' account of today's Tehran protests is veeeeeeeeerrrrrry interesting.
At times the two camps appeared to be shouting directly at each other, exposing the still-festering election rift within Iranian society and the political establishment underneath both at the Friday prayer enclosure on the university campus and on the streets outside.
As Mousavi supporters chanted "Death to the dictator," against Ahmadinejad, his supporters chanted "Death to opponents" of Khamenei.
As hard-liners repeated their signature cries of "Death to America" and "Death to Israel," riled-up Mousavi supporters overpowered them with chants of "Death to Russia" and "Death to China," the Islamic Republic's powerful United Nations Security Council protectors.
This little exchange underscores the fact that the United States is not the only great power with a stake in the outcome of what happens in Iran.
That said, one wonders if Russia and China will respond by doubling down on the current regime -- i.e., aiding and abetting Khamenei, Ahmadinejad, and the Revolutionary Guards in order to ensure a friendly Iran.
If this happens, 2009 could be a bizarro-world replay of 1953, when the United States backed a coup in Tehran order to ensure a U.S.-friendly regime. That move gave the United States 25 years of a friendly Iranian government, immediately followed by thirty years of a hostile Iranian government.
Readers, does this analogy hold up?
The Financial Times' Peter Garnham reports that China is getting serious about internationalizing the use of the renminbi:
China has kick-started a major plan to internationalise the renminbi and the process is likely to be faster than many expect, according to HSBC....
“China is beginning an ambitious scheme to raise the role of the renminbi in international trade and finance and to reduce reliance on the US dollar,” said Qu Hongbin, China chief economist at HSBC.
“This will likely be a multi-year and gradual process. Yet, we believe the pace is likely to be faster than many expect.”
HSBC said the internationalisation of the renminbi was long overdue, given China’s rising economic power relative to the limited use of the renminbi overseas.
If you read the whole story, you discover that the FT's evidence for this assertion rests entirely on assertions by HSBC officials. Which leads one to wonder whether maybe, just maybe, the FT should have checked to see whether HSBC has any financial stake in globalizing the use of the renminbi. Crazy talk, I know...
Loyal readers are surely aware that this is not the first time the Financial Times has hyperventilated over Chinese moves that don't necessarily amount to all that.
Now before anyone accuses me of going all Brad DeLong on the FT, I think a lot of their China coverage (particularly by Jamil Anderlini and Geoff Dyer) has been very informative. That said, this kind of thinly sourced story does lead one to wonder just how much of the coverage of China's financial moves is hype from financial players with a vested interest in feeding the China bubble.
Readers -- am I underreacting to this?
Daniel W. Drezner is professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.