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?
Not everything going on in international relations is about Iran. My latest column at The National Interest Online evaluates yesterday's BRIC Heads of State summit in Yekaterinaburg. The closing paragraph:
[T]hink of the BRIC grouping as an homage to other toothless international groupings. Indeed, most of the official BRIC communiqué consisted of pledges to do things that will clearly not be done, like finish the Doha trade round. In doing this, the BRIC coalition appears to be quickly learning from the grand tradition of fruitless G-8 and G-20 communiqués.
In the past 24 hours, there's been some interesting stuff coming out on both North Korea and Israel.
On the North Korea issue, Bob Gates' chat with an FT reporter is worth reading just to savor the man's obvious efforts to signal to the North Koreans that they can't control the agenda. However, Mark Landler and David Sanger's New York Times story today suggests that China is thinking about putting the economic and financial hurt on North Korea.
Meanwhile, the United States and Israel appear to be at loggerheads on the question of West Bank settlements. This is particularly interesting:
[T]he tenor of Mrs. Clinton’s comments Wednesday indicated to some analysts that the Obama administration was unlikely to budge from its position, even at the risk of putting Mr. Netanyahu’s government into jeopardy.
“She is stripping away whatever nuance, or whatever fig leaf, that would have allowed a deeply ideological government to make a settlement deal that is politically acceptable at home,” said Aaron David Miller, a public policy analyst at the Woodrow Wilson International Center for Scholars. “They’ve concluded, ‘We’re going to force a change in behavior.’”
Within the Israeli government, however, there is a consensus that the ever-growing settler population must be accommodated.
No one is talking about sanctions just yet on Israel, but the historical precedent here is telling. The last time the U.S. sanctioned Israel was in 1991 on the question of housing settlements. The eventual result was the fall of the Yitzhak Shamir government.
So China is contemplating sanctions against North Korea, and the United States a step away from doing the same thing vis-a-vis Israel. This highlights a cruel irony when it comes to the use of economic pressure -- it works on your friends a lot better than it does against your foes.
[I see where this is going. Stop it!--ed.] Of course, countries are understandably more reluctant to pressure their allies than their adversaries. [I'm warning you!--ed.] Why, it's almost like there's a paradox when it comes to economic sanctions. [All right, that's it, this ridiculously self-promotional blog post is over!!--ed.]
UPDATE: Ed Morse and Michael Makovsky have an excellent essay in The New Republic on the prospects of sanctioning Iran.
My latest Newsweek column is online. It looks at China's recent moves to challenge the dollar's status as the world's reserve currency and what to make of them.
The closing paragraphs:
If these moves do not amount to much, then why all the hubbub? To be blunt, America is out of practice at dealing with an independent source of national power. For two decades the United States has been the undisputed global hegemon. For the 40 years before that, America was the leader of the free world. As a result, American thinkers and policymakers have become accustomed to having all policy decisions of consequence go through Washington. Our current generation of leaders and thinkers are simply unprepared for the idea of other countries taking the lead in matters of the global economic order.
Most of China's recent actions do not constitute a real threat to the United States; indeed, to the extent that China helps to boost the economies of the Pacific Rim, they are contributing a public good. Obama—and Hunstman—need to make the mental adjustment to a rising China, welcoming many of China's policy initiatives while pushing back at those that threaten American core interests. If they can make this cognitive leap, then Sino-American relations can proceed on the basis of shared interests rather than mutual fears.
It turns out that Zhao Ziyang, China's Communist Party chief during the Tianamenn massacre (and who was outsted for opposing a violent crackdown), secretly recorded a memoir of his time in power.
This is very exciting -- as the New York Times' Erik Eckholm observes, "In a sharp break with Chinese Communist tradition, even for dismissed officials, Mr. Zhao provides personal details of tense party sessions." In other words, there's some good dirt here for China scholars.
One little thing nags me about Eckholm's story, however:
One striking claim in the memoir, scholars who have seen it said, is that Mr. Zhao presses the case that he pioneered the opening of China’s economy to the world and the initial introduction of market forces in agriculture and industry — steps he says were fiercely opposed by hard-liners and not always fully supported by Mr. Deng, the paramount leader, who is often credited with championing market-oriented policies....
Roderick MacFarquhar, a China expert at Harvard who wrote an introduction to the new book, said it had given him a new appreciation of Mr. Zhao’s central role in devising economic strategies, including some, like promoting foreign trade in coastal provinces, that he had urged on Mr. Deng, rather than the other way around.
“Deng Xiaoping was the godfather, but on a day-to-day basis Zhao was the actual architect of the reforms,” Mr. MacFarquhar said in an interview.
I'm not a China expert, but I am a seasoned reader of political memoirs. And, in my experience, memoirists do tend to paint a picture of their deeds that magnifies their accomplishments at the expense of others. I see no reason why Chinese political memoirs should be any different from American political memoirs on this score. So I'm going to take Zhao's claims on this point with juuuust a small grain of salt.
[Hmmm.... note to future version of you -- compile top ten list of best political memoirs--ed. So noted.]
The New York Times runs two op-eds today on the future of the dollar's status as the world's reserve currency, particularly with regard to China.
Victor Zhikai Gao's essay doesn't actually say a whole lot on the matter, except for this excerpt:
Beijing recently called for a greater role in international trade for the special drawing rights currency of the International Monetary Fund. But China is also fully aware that the United States can veto an I.M.F. decision. China’s call was more meant to sound an alarm to the United States.
Many Chinese people increasingly fear the rapid erosion of the American dollar. The United States may want to consider offering inflation-protection measures for China’s existing investments in America, and offer additional security or collateral for its continued investments. America should also provide its largest creditor with greater transparency and information.
As Brad Setser points out, it's a bit rich for the Chinese to fret about U.S. inflation, since if the renminbi started appreciating, many of the macro imbalances currently plaguing the international monetary system might be lessened. Of course, talking about "currency appreciation" puts the onus on Beijing, while talking about inflation conveniently puts the onus on the United States.
The other op-ed is by Nouriel Roubini -- a.k.a., Dr. Doom. It's a good primer on the benefits that accrue to the United States from having the dollar as the world's reserve currency. That said, this part confused me:
We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. We have been able to issue debt in our own currency rather than a foreign one, thus shifting the losses of a fall in the value of the dollar to our creditors. Having commodities priced in dollars has also meant that a fall in the dollar’s value doesn’t lead to a rise in the price of imports (emphasis added).
The other parts of that paragraph make sense, but that last sentence mystifies me. Wasn't part of the reason that oil and other commodity prices spiked last year was the declining value of the dollar?
In general, both op-eds urge the U.S. to get its financial house in order. I certainly don't disagree with that recommendation. Still, it's a bit disingenuous to suggest that the U.S. is the only country at fault for the current overhang of dollar reserves. Beijing needs to take a good hard look in the mirror on this issue.
Earlier this week, I pointed out that American higher education was not like the American auto sector, because it's actually quite competitive in the global marketplace.
I see that the Washington Post's Susan Kinzie has a story that nicely illustrates this point:
Until fall 2007, the number of Chinese undergraduates in the United States had held steady for years, at about 9,000, according to the Institute of International Education, which promotes study abroad. But that year, it jumped to more than 16,000.
Experts say China's increasing wealth, fewer delays in obtaining visas and technology that makes it easier for Chinese students to learn about U.S. schools have helped fuel the boom. It shows no sign of letting up.
"People just think the education offered in the U.S. is undoubtedly the best in the world," said Betty Xiong, 20, a U-Va. junior from Shanghai....
Historically, students have been more likely to come to the United States for advanced degrees and research opportunities. The dramatic shift is in the rising number of undergraduates.
"In China, because so much of the growth is tied to international trade and multinational corporations with investment in China, the value of U.S. higher education is clearly understood and worth the investment of cash on the other side," said Peggy Blumenthal, chief operating officer of the Institute of International Education. Students started arriving about 1980, after the normalization of relations. There was a dip in applications after the Tiananmen Square crackdown in 1989, Blumenthal said, because the Chinese government made it more difficult for students to leave.
I'm off at a conference today, so blogging will be light. Talk amongst yourselves.
Here's some topics of conversation: The National Interest has some fascinating essays in its latest issue. In particular:
[Full disclosure: I'm a senior editor at TNI.]
FP readers have no doubt discerned that your humble blogger's #1 topic of interest for 2009 has been the relative rise of China, the relative decline of the United States and the effects of these power shifts on the global political economy.
That said, an emerging subtheme will be breathlessly hyped reporting that melodramatically exaggerates either shifts in China's power or shifts in Chinese preferences.
For exhibit A, I give you the Financial Times Jamil Anderlini and Javier Blas , who report, "China reveals big rise in gold reserves." Let's go to the lede:
China has quietly almost doubled its gold reserves to become the world’s fifth-biggest holder of the precious metal, it emerged on Friday, in a move that signals the revival of bullion after years of fading importance.
Gold rose to a three-week high of more than $910 an ounce after Hu Xiaolian, head of the secretive State Administration of Foreign Exchange, which manages the country’s $1,954bn in foreign exchange reserves, revealed China had 1,054 tonnes of gold, up from 600 tonnes in 2003.
The news could spark interest in gold among other central banks. “When the largest holder of foreign exchange reserves discloses an increase in gold holdings, other countries may decide to think more carefully about underweight gold positions,” said John Reade, a precious metals strategist at UBS.
The increase in China’s gold reserves has come primarily from domestic production and refining. However, the news raises questions about the future of Beijing’s foreign reserves policy.
Ooooh.... this could be a Very Big Deal!! Gold could supplant the dollar!! Hide the children in the basement!!
Well, let's crunch the numbers first. Unless
MS Excel's my math is way off, China's gold reserves are now roughly worth $30 billion. Which means they constitute less than two percent of China's total reserve holdings. Furthermore, China's doubling of its gold reserves in the past five years actually means that Beijing has diversified away from gold, since the total value of China's foreign exchange reserves has increased tenfold during the same period of time.
No wonder, therefore, that buried deep down into this story you see the following passage:
Paul Atherley, Beijing-based managing director of Leyshon Resources, said that even after the latest purchases China had a very small percentage of its reserves in gold, far below the US or other developed countries.
“Those [gold] holdings are still too low in terms of the size of its economy and the growing significance of its currency,” he said.
China's power is undoubtedly increasing. Not every action by Beijing, however, is indicative of attempts to alter the current global political economy.
Hmmmm.... let's see what is on the commentary page of the World section of the Financial Times website. See if you can spot the trend:
As one reads what the Chinese economic elites are saying about the rest of the world's economies, one begins to wonder why they don't start blogging. The snark level is rising fast.
Lou Jiwei, head of China Investment Corp, said he was pleased he did not make a single trip to Europe in 2008 after EU officials expressed concerns about his fund’s transparency and intentions.
But speaking at the Boao Forum for Asia, China’s riposte to the annual World Economic Forum meeting in Davos, he said he was considering investing on the continent again, now that European officials have been humbled by the global financial crisis. “I have to thank these European officials,” Mr Lou said. “They saved me a lot of money. Now they come to me without conditions and I am beginning to consider making investments in Europe again.”
Mr Lou did not mention CIC’s experience in the US, where the fund made controversial – and costly – investments in Blackstone, the private equity group, and Morgan Stanley on the eve of the crisis.
Actually, Lou could probably retort that since CIC held a lot of their overseas assets in liquid dollar investments, they did surprisingly well in the past year.
To the wise investors, go the snark.
Your humble blogger is listening in to a Q&A with Treasury Secretary Timothy Geithner, courtesy of the Council on Foreign Relations, which has said, "Chatham House Rules be damned" and is allowing bloggers like me to prattle on. This post will be updated through the next hour. On to the show!!
9:15 AM: We're also allowed to e-mail questions. I resist the temptation to write, "Just how much do you want to gut-punch Paul Krugman?" and instead submit a question about China. Let's see if it gets in the queue!
9:20: Roger Altman is moderating, and opens by noting that the Fed has provided an estimated $14 trillion in various of guarantees and injections of capital into the global financial system. Gulp.
9:22: Geithner opens with a shout-out to his old staff at the New Yor Fed. This is one reason why past staffers like him so much.
9:23: Quotes former Mexican president Ernesto Zedillo: "Markets overreact, so policy should overreact." Says we've borowed too much, taken on too much risk, and ordinary Americans are now bearing the cost, which makes it fundamentally unfair. American people are justifiably pissed (he did not use that word). Notes that the absence of a serious recession over the past two decades created false expectations of continued prosperity.
9:24-9:31: Basically a reprise of his testimony from yesterday.
9:31: Now pushing for global coordination of standards at the G-20.
9:32: OK, let's get to the actual Q&A!!
9:37: Altman asks about the future of the plan if Congress does not authorize any additional TARP funds. Geithner tap-dances, basically says that they would need to muddle through.
9:43: Oh, sweet Jesus, Benjamin Barber is asking a question. And Timothy Geithner just said he sounded like an economist!!!
Seriously, Barber asks a semi-decent question about whether the bank plan socializes losses and privatizes the benefits. Why not nationalize?
Geithner responds by saying that governments, in a time of crisis, have to be prepared to assume risks that private actors cannot absorb -- but still have o avoid assuming too much risk. The complexity and scale of these financial institutions would force the government to assume way too much risk if nationalized.
9:46: A lawyer asks whether the Treasury has an estimate of the value of the toxic assets held by the ten largest financial institutions. Geithner responds : "If that was a knowable, high enough number, we wouldn't have a crisis." Then says that they're relying on a range of public sector and private sector estimates. States that the market value of these assets now is probably much less than they might be in a less panicked future.
9:52: Geithner is asked about China (not my question) and the IMF's new proposals for expanded lending. He responds by praising Zhou Xiaochuan, China's central bank governor, but claims that he hasn't read his proposal in detail. Geithner makes it clear that he is quite open to expanding the IMF's Special Drawing Rights for less developed countries. Still, he wants it to evolve and be integrated within the current international monetary system -- as opposed to the de novo creation of a new global currency.
I've read the report (Tim, it's not that long, take a look!) and Zhou is not proposing anything so radical so soon, so this is a bit of a red herring. Still, Geithner's statement here carries the same kind of firm pushback that Obama gave yesterday about any move ending the dollar as the global reserve currency.
Geithner follows up by saying that the future of the dollar in the international system is really a function of long-range U.S. fiscal policies. Wants to keep U.S. debt-to-GDP ratio stable, and asserts that there is now a consensus in Washington about fiscal rectitude. This is juuuust a little strange to hear given this year's fiscal balance sheet.
10:00: Asked a question about what he expects from the G-20. Boilerplate response, which is not encouraging. Wonder if he's read the Czech PM's recent statements.
10:08: A good follow-up to the G-20 boilerplate, asked about the Scandanavian plan to rescue banks. Geithner's response: "We are not Sweden," though looking at the Seems his chief concern is that there will be a premature withdrawal of rescue efforts
10:09: Herb Levin asks the extent to which exchange rates play a role in these decisions. Geithner: "Is this a trick question?" and laughs it off. A little too much tap-dancing here.
10:10: Asked if there is a limit to the Fed's balance sheet, and Treasury's ability to backstop that balance. Geithner punts it to Bernanke, then references this joint Treasury/Fed statement.
10:13: Asked what headline he wants from the upcoming G-20 summit, and he replies something like "Broad, coordinated action across range of issues by G-20." And this is why Geithner is not in the newspaper industry.
10:14: Last question. Roger Altman asks Geithner "on behalf of the markets" to clarify his response to the PBoC plan on the future of the dollsar. Says he continues to see the dollar as the world's reserve currency for both the short-term and the long-term. Also stresses the need for macro-fundamentals to be strong enough to ensure that this continues to be the case.
That's a wrap!
Susan Strange, the godmother of international political economy, wrote a book that is suddenly very relevant to thinking about today's international monetary system. In Sterling and British Policy, Strange talked about different types of international currency. Top currencies, for example, are forms of international money where the economic incentive to hold them is pretty overwhelming. Negotiated currencies, on the other hand, are forms of international money where there the economic incentive is more muted, but political imperatives lead to an agreement on a particular form of currency as the reserve to hold.
Why am I bringing this up? Remember, like 48 hours ago, when I said that this news item warranted watching?
Well, this Financial Times story by Jamil Anderlini drops the other shoe:
China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.
In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.
Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China.
“This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money,” said Qu Hongbin, chief China economist for HSBC....
China has little choice but to hold the bulk of its $2,000bn of foreign exchange reserves in US dollars, and this is unlikely to change in the near future.
Here's a link to the actual paper, which is not long.
That last paragraph is important -- what China is proposing is not going to happen anytime soon. Indeed, looking at the actual proposal, I'm not convinced that Beijing's idea is even doable (a show of hands -- who's comfortable with the IMF as the world's central bank? Anyone?).
With China and Russia both proposing some sort of change in the international monetary system, we're about to some veeery interesting economic negotiations. There are other important players -- the EU, UK, Japan, Brazil, the Gulf economies, etc. And their incentives to switch away from the dollar are more cross-cutting. For example, while the EU would probably love to switch to a system that keeps the euro from appreciating too much, I suspect they will be loathe to reallocate the IMF voting quotas that China would demand in any switch to a new system. Both Japan and the Gulf economies have security considerations that make them less eager to change.
If this does happen, however, the United States will suffer a serious loss of standing and, oh yes, a much harder budget constraint. And whatever happens, it would be difficult to call the dollar a top currency anymore. I think we have clearly crossed some threshhold where the dollar is now a negotiated currency -- and some of the negotiating partners are pretty hostile to U.S. hegemony.
You'll have to read it to see why.
One could be excused for thinking, in this kind of news environment, that Beijing is literally taking over the world. Some perspective is useful, however. There is no question that China is trying to turn this crisis into a series of opportunities. There is a question, however, whether these opportunities will actually be realized....
Let’s be clear—China is clearly on the rise, and they will be punching their weight more frequently in venues like the G-20, the U.N. Security Council and Asian regional forums. Greater activity does not always equal greater influence, however. So if you read that China is taking over the world, take a deep breath and relax.
Daniel W. Drezner is professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.