The US and China make quite a couple. Harvard historian Niall Ferguson calls the duo “Chimerica”. Others liken them to Siamese twins dependent on each other. Of late, this couple has been behaving exactly as that—a marital couple. They argue loudly and make life hell for their neighbours. But they never acknowledge their own mistakes.
The most recent fight started last week, when Barack Obama called for a “market-oriented exchange rate” in China; Chinese Premier Wen Jiabao insisted over the weekend that the yuan wasn’t undervalued. After all these shouts, this week, 130 US legislators demanded China be labelled a currency manipulator, and even threatened tariffs.
Illustration: Jayachandran / Mint
No one wants a repeat of the 1930s protectionism. But no one wants global imbalances to fester either: China’s trade surplus translates into dollar reserves that, when invested in dollar assets, push down interest rates. So the neighbours have to tell both China and the US to start behaving.
These neighbours—emerging markets—have a big stake here. Because the yuan hasn’t appreciated since 2008, India or Indonesia don’t want their currencies to rise—something capital inflows force—lest their exports lose out to China’s. They should be telling Beijing to allow appreciation. But on Thursday, India’s chief economic adviser Kaushik Basu ruled this out.
That’s a pity, because this kind of multilateral effort—call it couple’s counselling—is feasible, as Johns Hopkins University’s Arvind Subramanian and the World Bank’s Aaditya Mattoo argue. The one problem with this public therapy session is that China, trying to save face, only gets more stubborn when singled out for blame. So perhaps the counsellors should hold the session behind closed doors. And perhaps, in the interests of give and take, they should probe the other partner too.
Washington keeps harping about the yuan, without admitting that the yuan, in fact, appreciated since 2005—but without decreasing the trade imbalance. Something in the US could be equally amiss: Just as China has been running a large trade surplus, the US at the other end has been running a large deficit. Unless high consumption is tackled, US consumers would just move to Vietnamese goods.
Then, the neighbours must get the US to own up to this, too. After years of low interest rates in the US—a stance the Federal Reserve continued this week—there has been little incentive to save. If Chimerica wants to be a happy couple, this has to change, too.
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