Categorized | Currency

Obama Has To Tell Beijing Some Hard Truths

The following article appeared as an opinion by Fred Bergsten in the Financial Times on on November 28, 2010.

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 Organization 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 program 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 high ground for America.

The policy conflict with China now plays out on three fronts. The House of Representatives has passed a bill authorizing countervailing import duties against the export subsidies created by undervalued exchange rates as with China. The Senate needs merely to attach this language to “must” legislation, such as extension of the tax cuts, and it will land on Mr. Obama’s desk for almost certain signature. Another response would be to forge a broad coalition to take China to the WTO under its rule that prohibits countries from “taking exchange action that frustrates the intent of the agreement”.

A second front is the next Treasury report on foreign exchange practices, delayed from its due date of October 15 pending further evidence of China’s exchange rate intentions and the Group of 20 summit. The Seoul outcome was minimal and the average value of the renminbi has weakened since China announced “greater flexibility” in June. So the Treasury must designate China (and a few others) as a manipulator, as Mr. Obama came close to doing publicly after Seoul.

Then there is the visit of Hu Jintao, China’s president, to Washington in January – although it is hard to see what they can agree that they were unable to do at the G20 summit.

The G20 stalemate has intensified the feud over currencies and trade rather than helped to resolve it. Mr Obama has to notify China privately that his administration will designate it as a “manipulator”, support new legislation and take China to the WTO unless it lets the renminbi rise substantially before the Hu visit. The Chinese say they will never move under foreign pressure but have revealed they will do so only under such pressure. The world economy will fare much better under the proposed strategy.

The writer is director of the Peterson Institute for International Economics


7 Responses to “Obama Has To Tell Beijing Some Hard Truths”

  1. Bob Hall says:

    Here’s another hard truth:

    You think it’s bad to buy Chinese goods?

    Then don’t buy them!

    It’s really not so complicated.

  2. ego1 says:

    Some silly people would say “don’t buy Chinese products”. What other choice do I have? From shirts to shoes, electronics to batteries, all it’s Chinese. These people have no industrial standards, no safety standards, no social standards, etc, as us hence their costs are extremely low, amen then get subsidies from the Communist Government, which does not care if there is no profit, because THEIR main problem is taken care of: social stabilization and development. The solution although no one will admit it - it’s scrapping the “free” trade, which is not free at all. I have not even started considering the industrial rights violations and the infringement of patents when manufacturing is copied in China…That’s a different chapter.

  3. Frank says:

    I think it is very hard to find an American made product in the stores. How can I buy American when the stores will not put it on the shelf?

  4. Bob Hall says:

    Google “American-made goods.” You’ll be amazed at what you can find with just a little extra effort.

  5. Ian Fletcher says:

    The real problem with our economy is free trade, which is killing jobs and running down our industrial base. *Real* economics doesn’t suport free trade.

    See my book “Free Trade Doesn’t Work” for details; the website is at

  6. What would happen if the government had decided certain companies had grown so large as to be destructive of the public interest. Those over fifty understand the pros and cons of the break up of ATT with the loss of Bell labs and the manufacturing prowess of Western Electric.We shipped the entire electronics industry to Asia. Today, Wal mart serves as the marketing arm of China’s factories. And as stated so many times, their strategy has become pandemic as Target, Costco, and vitually every other retailer follows suit.
    With one out of every five workers is now unemployed by consuming goods made in China, one solution is to place tariffs on these retailers of imported goods, with the tariffs fed to emergent US manufacturers.
    For starters, on then basis of monopolistic results apparent inn the market place, break up Goldman Sachs, Walmart, and the oligopolies of the food processing industry. I would love other targets of breakup.

  7. Michael says:

    Our government is very good at pointing our finger but our real enemy are those other three fingers - you know, the ones that point backwards.

    We can whine and complain about China’s manufacturing boom, which their government carefully and methodically crafted over the last 20 years while our government went on a massive spending spree, looted social security, and our banks started gambling (CDO’s, hedge funds, etc) and Bernard Madoff stole over USD 20 billion under the narcoleptic SEC. S&P and Moody’s amongst others were granting AAA credit ratings to junk real estate packages (nobody’s said anything about this still - I wonder why), which like the Milken junk bonds eventually collapsed nearly obliterating our economy.

    Always pointing fingers at everyone else - while neglecting the simple common sense fact that we have an internal infrastructure problem that we need to fix ourselves - that’s right - we need to do some self examination FIRST and fix our domestic problems before we go pointing fingers at whomever riles us. That kind of behavior is immature and I continue to be shocked at our foreign policy posturing and rhetoric - we seem to have no respect for anyone and if the media is to be believed - we come off as incredibly arrogant.

    Nobody likes win-lose propositions but that seems to be all we’re capable of doing with foreign policy - and of course we totally ignore our domestic problems. Simple example - we may criticize China for a vast array of things - but I dare anyone to stroll around Washington DC at night versus Beijing.

    This tiny thing is our national and international shame. Why should any country - even so-called banana republics - listen to anything we have to say when our own capital is a crime ridden cancer. We’re very very ill but we ignore the symptoms and pretend everything is good and all our woes are the fault of our neighbors.

    We live in an illusion promulgated by our politicians and media - our ability to think dulled by our addictions to entertainment. We’ve lost the concept of responsibility for our actions.


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