How often does a suit need to be rejected before the suitor gets the message? This is the question one must ask about the relationship between the US and China—all requests by the former for actions to redress bilateral trade imbalance have made little headway with the latter. The recent Group of Twenty (G-20) meeting in Seoul shows that despite knowledge of this rocky relationship, which is at the heart of discussions on global trade, optimism has trumped reality.
For many years, large developed countries such as the US have run trade imbalances. What has changed, however, is that in a flat world, free-flowing technology and capital have sharpened the effect of these imbalances on the US’ domestic market. To understand whether the G-20 summit really succeeded, it is worth considering whether the problems that it was seeking to address are worth solving in a coordinated manner or best left to national governments.
This column argues for the latter, because macroeconomic arguments can be viewed through different lenses. When we say China’s currency is undervalued, it should also be mentioned that there is nothing basically wrong with China’s policies, and these could easily be replicated by other developing countries to their benefit. One can only say that China has been more successful at adopting a low-cost manufacturing-led model than others. It is also difficult to see why Beijing might want to consciously overvalue its currency, and run the risk of reducing exports, increasing unemployment and creating social unrest. While the US may point fingers at China, it is equally possible for India to argue that the excessive run-up in the stock market in recent times is a function of the US’ quantitative easing. Since the answers to such economic questions are different for each country, achieving global coordination on trade can be tough. Yet failure of such talks can have the undesirable consequence of creating a sense of economic hostility where none should exist. Is it really worth trying to create a framework when it is actually the economic equivalent of the law of the jungle that is likely to prevail?
The G-20 and similar summits seem to be premised on the erroneous belief that there is only one way to manage global trade relationships. Nobel winning economist Michael Spence correctly reported in the “Commission on Growth and Development” in 2006 that both China and India successfully used trade policies that ran counter to the prevalent free-trade orthodoxy. Yet this focus on a singular method suggests a continued reluctance to accept that new developing countries may choose to handle global trade flows in new ways. Seeking coordination of the G-20 type may be less than effective.
This columnist feels that an acceptance of the new normal involves acknowledging that large emerging economies are best left to manage their economic affairs on their own without any guiding hand at a global level. There are signs of some awareness in this direction in the G-20. Its watered-down statement —“promote external sustainability and pursue a range of policies conducive to reducing imbalances”—reduces collaborative expectations to very low level.
Moreover, the G-20 meeting appears to endorse the need for “macro prudential measures”, which is a polite way of saying that some types of capital controls can now be discussed openly in civil society. Not long ago, countries such as Malaysia had been upbraided for suggesting capital controls as tools of the trade game. In the light of these comments, countries will now be left to rebalance themselves and address these problems at the national level. This will perhaps be through a gradual tightening of trade-related policies. Ironically, therefore, the true success of the recent G-20 meeting lies in the greater recognition that each country must fend for itself.
Govind Sankaranarayanan is chief financial officer and chief operating officer, corporate affairs, Tata Capital. He writes on issues of governance.
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