U.S. Treasury Secretary Timothy Geithner spoke at the Brookings Institution on Oct. 6 and outlined Washington’s economic and financial goals for a series of major upcoming international meetings. He called for G-20 countries to continue working together on global economic and financial challenges, and presented three points where the United States sees dangers to the global system.
The first is maintaining growth. Geithner repeated the American position that developed economies must continue to use fiscal and monetary stimulus to promote growth, and that it is too early to impose austerity. The United States has repeatedly argued against the eurozone economies, particularly Germany, that were reluctant to approve Greece’s bailout and are now undertaking austerity measures to get their public finances in order. Berlin does not want to sacrifice the rigid fiscal rules that have enabled its economic stability and would rather not bear the weight of its neighbors’ excessive debt levels. Instead, Germany would export its way out of economic trouble, specifically benefiting from import demand growth in the emerging economies like China, Brazil, India and Turkey. Geithner stressed that advanced countries whose growth depends on exports need to boost domestic demand.
Next, Geithner pointed to differences in exchange rate systems. Harking back to the famous 1944 meeting of global powers in Bretton Woods, New Hampshire, in which the post-Cold War global financial system took shape, he pointed to the problem of competitive devaluation, in which countries deliberately weakened their currencies so as to protect their domestic economy from imports and make their exports more attractive abroad. This strategy is widely considered to have led to World War II. On Wednesday, Geithner said the problem is better described as competitive non-appreciation, in which exporters prevent their currencies from rising. He pointed to the major developing countries, saying that they need to adopt market-based exchange rate regimes, particularly countries whose currencies are “significantly undervalued.” China is the most obvious culprit for this phenomenon, which Geithner called a “damaging dynamic.” Washington has recently taken aim at China’s monetary policy.
Third, Geithner spoke about the reformation of the global financial architecture and evoked the framework agreement signed at the September 2009 G-20 summit. He said that while the United States has boosted household savings, supposedly in the name of re-balancing global growth, nevertheless the countries characterized by large trade surpluses — Geithner specifically pointed to “China, other emerging economies, Germany and Japan” — needed to boost domestic consumption and not meddle with their currency values.
“Washington is insisting that the same emerging states that have demanded a bigger share in global financial governance after the crisis equally accept greater responsibility for upholding the rules.”
Geithner then offered one remedy for this situation. A premise of the G-20 crisis meetings has been that the countries that dominate the current financial system should allow up-and-coming countries to have greater stakes in the international financial institutions. Yet since the United States has identified several of these economies as not adhering to their end of the framework, Geithner added a new stipulation, saying that any reform in the governing structure of the international financial system needs to coincide with a new way of encouraging states with major trade surpluses to boost domestic demand and adhere more closely to market-based exchange rates for their currencies. He added that the United States and the other major economies would look at ways of doing so in the upcoming International Monetary Fund (IMF), World Bank and G-20 meetings.
The problem for China is that while Germany and Japan are U.S. allies, firmly lashed to the American-dominated international system, and have already been forced to change in response to American demands — such as the 1985 Plaza Accord in which Washington forced them to adopt market-oriented exchange rate policies — China is not. True, if the United States acts on the demand that these states genuinely boost their domestic consumption, it will further strain their relations. Germany in particular is seeking ways to limit its vulnerabilities to the United States, and its trade with the United States is already paltry compared to its trade with the eurozone. But China’s relationship with the United States is almost entirely based on economic cooperation, given its deep military and political distrust, and China inherently resists allowing foreigners to undermine its internal stability. If the United States pushes on China’s economy, Beijing will retaliate, and the relationship will deteriorate.
The idea of inventing a multilateral mechanism to handle China’s currency would, theoretically, remove from American shoulders the burden of having to coerce China, and spread it among U.S. economic partners. The idea is that China will not be able to resist the pressure from multiple directions and that it will not be able to simply retaliate against U.S. companies, as it would do if economically attacked by unilateral American action. Moreover, by linking currency reform to the reform of international financial institutions, Washington is insisting that the same emerging states that have demanded a bigger share in global financial governance after the crisis equally accept greater responsibility for upholding the rules.
In Beijing’s opinion, changes to the yuan should happen slowly, and with the option of reversal in case things begin to wobble. With the United States calling currency undervaluation a “multilateral” problem that needs a multilateral solution, Beijing may be able to encourage bureaucratic delays and hide among countries ranging from Brazil and Chile to Japan and Switzerland that are also fighting their currency’s appreciation. The multilateral solution cannot be produced overnight, so the United States appears to be granting China more time. Nevertheless, Beijing remains the most conspicuous violator of currency norms, given the size of its economy and economic relationship with the United States, and it is therefore the United States’ primary target. Thus the multilateral approach is still a threat, and if it proves ineffective, the United States will be more likely to impose penalties on China unilaterally.
While it is tempting to read into these statements that the United States is solely targeting China, in fact they imply something even more consequential. The Bretton Woods arrangement provided for the United States to open its massive consumer markets to its allies and partners. More than 60 years later, however, the United States, with a struggling economy, stark political divisions and intractable difficulties abroad, wants this system to change. It sees its long-neglected exports as an opportunity to drive growth, and wants other major economies to allow their currencies to rise and their consumers to have greater access to American goods. If the United States is serious about enforcing such a policy, it will require changes to the next three biggest economies — China, Japan and Germany — as well as to those who have grown accustomed to the status quo, that is, in some way, almost everyone else in the world.
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