The just concluded Seoul G20 summit has failed. The former chief economist for the IMF calls it a defeat for the U.S., and suggests a trade war could be the result. The domestic U.S. policy priorities are economic growth, and job creation. The American authorities want China to allow its currency to rise against the U.S. dollar, believing a stronger yuan will slow job killing Chinese imports to the U.S., and kick start investment in the U.S. economy.
Virtually all U.S. observers believe the Chinese currency is seriously undervalued, the only difference among them is about how high they think it needs to go up.
There is a serious problem with the American analysis. By focusing only on trade in goods, the U.S. perspective neglects flows of money, loans, and ownership capital which are at the heart of world payments imbalances.
As the richest industrialized nation, you would expect the U.S. to be lending money to other countries. Instead, for the last 30 years, it has been borrowing from other countries to finance its domestic expenditures, military and non-military. This inflow of money, loans and capital has propped up the U.S. dollar, facilitating American overseas spending. American firms buy up natural resources companies elsewhere, pay less for imports from abroad, and make investments in overseas manufacturing facilities, outsourcing U.S. jobs, thanks to foreign lending which supports a higher dollar.
When the Chinese decided they would welcome co-operation with foreign firms, they also were clear they would not allow majority foreign ownership of Chinese industries. According to the Chinese five-year plans, its industrial capacity would be built by doing sub-contracting work for global corporations. Naturally, many of these are American.
Sub-contracting is how American corporations have out-sourced jobs to China. Corporations are mainly attracted by low-cost, long-term agreements made with Chinese partners. Low wages prevail of course, but they are not all that the make the arrangements attractive. Global corporations seek cost stability; they sign contracts with Chinese companies that guarantee the work will be done on time, and will meet agreed standards for quality.
Over time, a significant increase in the value of the Chinese currency would have the effect of increasing the price paid by Americans for Chinese goods, and reduce the profit margins of global corporations, and their Chinese partners. Would it shift purchases from China to the U.S., increasing U.S. employment to help put the 15 million unemployed Americans back to work? Not only it this unlikely to happen on a large scale in a reasonable timeframe, it would not address the structural problems facing the U.S. and its economy; debt burdened consumers, mortgages under water, no plan for rebuilding public infrastructure, Congressional gridlock, out-of-control military spending, and a broken social safety net, which lie behind the jobs deficit.
Instead of pointing the finger at China, the Americans should be worrying about what happens when the Chinese currency does go up. In its next economic plan, expect the Chinese to switch their focus from sub-contracting to direct manufacturing -- by Chinese owned companies -- of autos, consumer electronics (TV sets, smart phones, computers, pads, pods, etc.) and a range of manufacturing goods. In order to sell these goods the Chinese need to buy material inputs abroad. A stronger currency will help them to do that, and their superior manufacturing processes, and still low labour costs will make their goods very competitive in the U.S. market and elsewhere. The Chinese will have no problem finding U.S. importers eager to sell low cost autos, and smart phones to cash starved American workers, retired people, and students.
The U.S. stance on international economic affairs follows domestic interests, what the U.S. is trying to achieve for itself. After the second world war, the U.S. set out to capture world markets dominated by colonial arrangements run by Britain, France, Germany, Portugal, and Italy. It favoured liberal internationalist policies, freer trade, and open access to raw materials. It fixed the official price of gold at US$35 an ounce, and guaranteed to convert overseas holdings of U.S. dollars by governments into gold.
In the 1970s under President Nixon, the Americans defaulted on that pledge, by devaluing the dollar, and closing the gold window. Effectively the world found itself with a dollar standard. The U.S. attitude was summed up by then treasury secretary, John Connolly: the dollar is our currency, and your problem.
Today, the way ahead is to build a new world monetary order, not based on the dollar. France, the incoming chair of the G20, understands this, and a French national heads the IMF.
In Seoul, the G20 agreed to have Canada and India co-chair a committee to report back on world payments imbalances. As the host of the Toronto summit, Canada sabotaged the French/U.K. proposal to introduce a bank tax, and refused to allow a discussion of a Financial Transactions Tax. This set the stage for the Seoul flop.
Seeing the Canadian Conservative government take a leadership role in resolving the China-U.S. disagreement should worry anybody concerned about where an outbreak of international economic disputes among the leading members of the G20 would leave the world.
Duncan Cameron writes weekly on politics and is president of rabble.ca.