Age cannot wither... way back in September 2003, Krugman was on the opposite side of this, sort of, mainly because Bush was going to China to complain about their overvalued currency.

His analysis of their economic threat was not of the caliber that eventually won him a Nobel (although the Bush-bashing was):

" But he got no satisfaction. A quick look at the situation reveals one reason why: the U.S. currently has very little leverage over China. Mr. Bush needs China's help to deal with North Korea — another crisis that was allowed to fester while the administration focused on Iraq. Furthermore, purchases of Treasury bills by China's central bank are one of the main ways the U.S. finances its trade deficit.

Nobody is quite sure what would happen if the Chinese suddenly switched to, say, euros — a two-point jump in mortgage rates? — but it's not an experiment anyone wants to try. "

Years later, Krugman seems to have considered the experiment more carfeully.

[link}

Dan should never ask if he is missing anything. He just shouldn't.

In this case, what he's missing is that other countries, including those of the G8, are vulnerable to Chinese pressure in ways the United States is not (for one thing, China's foreign reserves are mostly in our currency, not anyone else's. If the dollar crashes, China isn't wearing a seatbelt). While it's a fair point that an overvalued renminbi hurts other economies even more than ours is, this is not an argument other G8 governments are making right now. Maybe they just haven't gotten round to it; maybe they're waiting for American leadership. Or maybe they want to see if the United States will actually do something in response to Chinese currency manipulation, as opposed to calling for a conference at which government will be invited to talk about doing something, someday.

This isn't to say I'm persuaded by Krugman's argument. Throwing up a tariff wall, even a temporary one, would have consequences many years down the road that are difficult to see now. I'd prefer planning for a period during which both the Chinese and everyone else were informed, plainly and in public, the direction American policy was likely to take in the absence of an adjustment in Chinese policy. Ideally the Treasure Department would take the lead; the President should not issue threats or otherwise speak directly to this subject unless he has to. I'm not for starting any trade wars, but if one is being waged against us compacent idleness may not be the best policy for the present or the future.

Allan: nowhere in the post did I imply that China wasn't manipulating the yuan. Let me be as clear as possible: China is totally manipulating the value of the yuan, and steps should be taken to correct the problem. My issue is with Krugman's proposed response , which is ill-considered and counterproductive.

Zathras: How are other members of the G-8 vulnerable to Chinese pressure?

It seems both The Economist and Mr Drezner have taken issue with Mr Krugman's tub-thumping nationalism, but I have yet to see either of them propose a serious solution. A link to the G8 page on wikipedia? That's cute, but how will that solve the problem? The G8 has been putting pressure on China for years, to no effect. The IMF and G20 are muzzled. The Chinese will not move on this until serious economic pain finally permeates through the thick calluses of their political apparatus. A punitive tariff as proposed by Mr Krugman may start a trade war, but as far as a lot of people are concerned we're already in a trade war with a hostile mercantilist power, so the difference will be small.
Chinese currency manipulation is directly driving down unemployment in China and raising it in the US and south-east Asia. At a time of 10% unemployment in the US and shrinking wages, while wages are growing at 13% in China, this is unacceptable. Trade wars have been started over a lot less in the past.

I think the information from Keith Bradsher (NYT) concerning the Chinese failure to provide the information the G20 leaders had agreed to share in their Pittsburgh statement is serious (see my blog post at Rising BRICSAM). Equally serious is the Chinese (and it appears the Brazilian) refusal to allow the IMF to issue the annual staff Report (in the Chinese case since 2007).

But the idea of another grouping - sans the Chinese - after just creating the G20 Leaders summit - is probably not a good idea - nor is a unilateral action - for the moment. So I think collective effort is probably the way forward through the G20 June summit in Toronto. And I would keep this up through the Seoul summit in November.

And because a more public 'naming and shaming' is only likely to raise 'prickly defensiveness' on the Chinese part I would not make it a large public display. But I would build a 'quiet coalition' - probably starting with the G20 Asian caucus - India, Japan, South Korea, Indonesia and Australia - but adding in members of ASEAN to consider joint action. Such joint action could be at the WTO.
We need to be more creative and less bullying.

I know this post is sort of intended to be punchy, but calling Krugman a neocon seems a little much - isn't this far more realist/mercantilist than neoconservative?

I can understand the formula of liberalism + unilateral muscle = neoconservatism, but that's a simplification. To call Krugman a neocon you would have to see this wedded to a manichean worldview, and a championing of markets/democracy.

Here, instead, you have Krugman saying that the market won't, on its own, fix this problem by making it too damaging for the Chinese to keep it up, and that instead the U.S should use unilateral governmental action to force China into an agreement.

So what Krugman's really saying is that the markets are failing, and that multilateral institutions in an anarchic world are weak, and that the U.S should use its power to secure favorable trading relationships. That's realism, not neoconservatism.

It's called mercantilism. China sees itself as an enterprise and, like all enterprises, seeks to gain the edge. Our short-term rates are near zero, yet the dollar remains overvalued. If rates go up, so will the dollar. If the EU or Asian's economy falters, the dollar goes up. Is this China's fault or the fault of an American economy based on consumerism and finance instead of production of exports the rest of the world wants? For example, it's estimated that 10% of the U.S. manufacturing economy is connected to cars. American car export is insignificant. Ironically, one of the few bright spots on the GM ledger is as a domestic manufacturer in China. Everybody there wants a Buick!

We like a consumer-based economy, but it's not the only economy, and there are strong moral arguments against it. I've seen the impact of the so-called free market and rampant consumerism in countries not founded on it, and it's not all pretty. I think we're still engaging in the Cold War triumphalism of, "We won, now be like us." To me that's always had a stench.

Actually, I think Krugman is accusing the Chinese of exchange dumping, selling its currency at a lower price on the export market than it's worth on the domestic market. Weren't the Chinese keen to join the World Trade Organization? Seems like keeping their currency low is a subterfuge for dumping without running afoul of WTO rules.

Anyway, nations can trade currency any way they see fit, as long as they're not doing it criminally, like laundering contraband currency or counterfeiting. If the Chinese find it advantageous to trade the way they do, then so can we. Crying Foul is a sign of weakness. It sounds like the U.S. is acknowledging that China has more influence on the value of the dollar than our own Fed.

And who got us into this fix? We did, by abandoning the gold standard and fixed rates, letting the dollar become a commodity like any other, subject to the manipulations and vagaries of any open market, except that with currencies, nations become players. We made our bed, now we have to lie in it.

China is the Microsoft of nations. It behaves in its own interests. But this begs the question of whether big is bad. And isn't this what the debate is really about?