Salvation does not lie in demagogic attacks. Beijing must be treated as an equal – or another Great Depression beckons
The key relationship for any global recovery is between the US and China. By the same token, any serious deterioration in their relationship would propel the world towards a second Great Depression. The Chinese citizen has funded the credit-driven American consumer boom: or, to put it another way, China’s government has enabled the US to run an enormous current account deficit by buying huge quantities of US treasury bills. If China stops this, the value of the US dollar would plunge, and a bitter trade war, engulfing the rest of the world, would ensue.
There are grounds for optimism. The relationship between the countries has been remarkably stable for three decades – notwithstanding Tiananmen Square, China’s meteoric economic rise, and presidents like Bill Clinton and George Bush threatening to treat China differently. However, there has always been an asymmetry at the heart of the relationship. China once needed the American market, and its co-operation, more than America needed China. From the outset of the reform programme, Deng Xiaoping made it clear that American co-operation would be a precondition of its success. But the balance of power has now been transformed and, whether or not it chooses to recognise the fact, the US needs Chinese co-operation as much as China needs the US’s.
This requires a very different mindset in Washington. As the previously unrivalled global hegemon, the United States is not used to dealing with other countries as equals. Blatantly the case in Bush’s presidency, it has been true ever since 1945. Obama’s presidency rests on new assumptions: it recognises that American power is not what it used to be and that the country faces a huge economic crisis. But in practice will it be mindful of and sensitive to the interests of other nations? The widely criticised statement by the new Treasury secretary, Timothy Geithner, that China was manipulating its currency suggests not.
No previous administration has made such a grave accusation. If the US treasury officially decides that China is a currency manipulator, the administration could resort to a range of actions including anti-dumping measures, countervailing duties and various safeguards. It would certainly provoke a response from China, with a trade war drawing in other countries a likely possibility.
In fact, the charge that China undervalues its currency has little foundation. Beyond a point, the Chinese government has little control over the value of its currency, which is largely determined by market forces. Furthermore, since the peg to the dollar was abandoned in 2005, the renminbi has appreciated 21% against the greenback. Geithner’s charge was thus a deliberate provocation. It was also highly insensitive. China, still a poor country it should be remembered, is feeling the effects of the financial meltdown with a declining growth rate and rising unemployment: an appreciation in the value of the renminbi will only exacerbate its domestic impact.
The great danger facing the world is that what looks like a depression will deepen into a slump. In this situation, there can be no salvation in domestic recovery alone; in a globalised world, every country’s domestic recovery will be intimately linked to a wider global recovery. But the latter in turn requires a new kind of global co-operation.
Herein, I believe, are grounds for considerable pessimism. There can be no solution that relies on the old G7 and the institutions of Bretton Woods, namely the IMF and World Bank. The architect, patron and prime beneficiary of this system, the US, is simply no longer powerful enough to underwrite it. This was implicitly recognised by the decision to have a meeting of the G20, rather than simply the G7, last November.
China’s premier, Wen Jiabao, made this point forcibly at Davos when he called for a new world economic order. But simplistic demands for a recapitalisation of the IMF demonstrate that western minds are still living in the past: any refinancing depends primarily on China, and Wen has made it crystal-clear that China will not provide any funds for the IMF until there is a wholesale reform of the organisation. While it is dominated by the US and Europe, China does not regard it as the kind of global institution it can support in the only way that counts – with its huge resources.
Bretton Woods is on a life-support machine. Any global recovery depends on a new financial architecture that acknowledges the decline of developed countries and the rise of the developing world, notably China. This will require a new kind of humility on the part of the US and a recognition that it must share power with a range of new stakeholders, especially China. Instead, Geithner makes a demagogic attack on China, playing to a domestic audience that, as in Europe, is becoming increasingly protectionist-minded.
If the US goes down this road, the result will be growing protectionism, a trade war and the second Great Depression. The key to any solution is not simply a continuation of the positive relationship between China and the US, but a new kind of accord in which the US recognises China as an equal partner, and the need for a new global financial architecture based on that principle.