The currency war is phoney

At the US recession’s core is a collapse in investment. America should sort out its own economic policy, not attack China’s

John Ross
Guardian

The core of the “currency wars” – in which China has been accused, primarily by the US, of undervaluing the renminbi to boost its exports – is a simple piece of arithmetic. The US has only a quarter of China or India’s population.

America can remain the world’s largest economy only if average Chinese or Indian living standards never exceed 25% of its own. As – rightly – China and India will never accept this, a peaceful global outcome therefore requires the US to abandon its undesirable and impossible goal.

The immediate political background is September’s vote by America’s House of Representatives threatening China with tariffs unless it increases the exchange rate of its currency. Speaker Nancy Pelosi claimed the legislation was a “key part of our Make It in America agenda”, arguing that forcing China to revalue the renminbi, thereby increasing the price of its imports, “could create a million US manufacturing jobs”. The dollar’s exchange rate then slid as the Federal Reserve accepted quantitative easing – that is, printing dollars – and central banks, including that of Japan, intervened to try to drive down their currencies against the dollar.

Pelosi does not seem to appreciate, however, that the US cannot profitably produce the goods it imports from China. If tariffs were imposed, similar low-price products would be imported from India or Mexico. No American jobs would be created. Indeed, a trade war would lead to a net loss of American jobs. Any country hit by tariffs invariably reciprocates, and China would act against competitive US industries such as farm products and hi-tech.

American politicians are to some degree seeking a scapegoat for domestic problems – the equivalent of Nicolas Sarkozy’s anti-Roma campaign. But if the long-term goal of the US to remain the world’s largest economy is neither just nor achievable, it can engage with a perfectly legitimate concern – ensuring its population has the highest possible living standards.

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