Talking about FT.com / Comment / Opinion – Obama has to tell Beijing some hard truths

 

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FT.com / Comment / Opinion – Obama has to tell Beijing some hard truths

With policymakers failing to make progress on the critical issue of global imbalances, America has no alternative but to put China on notice. Privately but promptly, Washington has to inform Beijing it will label it as a currency manipulator, back legislation treating the manipulation as an export subsidy, and take it to the World Trade Organisation if it does not let the renminbi rise significantly. The renewed increases in the external imbalances of the two main economies pose major risks. China’s surplus is again climbing while it tightens monetary policy because of concerns over overheating. It thus maintains its rapid expansion partly at the expense of other countries and damps global growth. It should instead let its currency rise and limit the cutback in domestic demand. That would help contain inflation and offset the resulting decline in its trade surplus.

US output growth has been cut in half in the past six months by the renewed sharp expansion of its current account deficit. The Federal Reserve’s second round of quant\

\With policymakers failing to make progress on the critical issue of global imbalances, America has no alternative but to put China on notice. Privately but promptly, Washington has to inform Beijing it will label it as a currency manipulator, back legislation treating the manipulation as an export subsidy, and take it to the World Trade Organisation if it does not let the renminbi rise significantly.

The renewed increases in the external imbalances of the two main economies pose major risks. China’s surplus is again climbing while it tightens monetary policy because of concerns over overheating. It thus maintains its rapid expansion partly at the expense of other countries and damps global growth. It should instead let its currency rise and limit the cutback in domestic demand. That would help contain inflation and offset the resulting decline in its trade surplus.

US output growth has been cut in half in the past six months by the renewed sharp expansion of its current account deficit. The Federal Reserve’s second round of quantitative easing and the likely extension of some form of the Bush tax cuts are efforts to provide offsetting boosts to domestic demand – but they may not succeed.

So, the rebalancing strategy is moving in the wrong direction. The huge US budget deficit and the Fed’s easing have replaced the US private sector as “consumer of last resort” and trade is impeding rather than leading the recovery. China’s reserve hoard grew faster in the latest quarter than ever before. Its global trade surplus for the past six months is more than 50 per cent above last year’s. The trade imbalance between the two countries has recently hit record levels.

In the medium run, this pattern will lead to further retreat from open trade and free financial flows. In the longer term, the enlarged imbalances will sow the seeds of renewed crises. The huge capital flows from surplus to deficit countries, Germany to the eurozone periphery as well as China to America, helped create the loose monetary conditions that encouraged the irresponsible lending that brought on the Great Recession.

The most effective way for President Barack Obama to break the impasse is to start adopting a serious strategy for US budget reform as proposed by the co-chairs of his Fiscal Commission, who rightly urge an ambitious programme of deficit reduction. Only such an initiative will convince other countries the US is serious about rebalancing its own economy and so persuade them to rebalance theirs. This would regain the moral

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