The richer countries of the world, like the United States of America and the European Union, have undergone a reversal of roles. They are increasingly dependent on the developing countries to sustain their living standards. The growing current account surpluses of China, Japan, Taiwan and India have led to booming foreign exchange reserves of these countries, which are invested in gilts and other securities of the richer West.Yet in spite of this magnificent support to the global economy, Asia is at the receiving end of criticism and pressure from the richer countries.
The secretary of the US treasury, John Snow, had a particularly unedifying visit to China early in September 2003, when he tried to pressure China to revalue its currency, the remninbi, so as to make its exports less attractive and thus favour US manufacturers of competing goods. This was quite a change from the usual pattern wherein the US complains that the developing countries should devalue their currencies. But the US has today a large current account deficit, which can be cured, if at all, by a sharp devaluation of the greenback. Already, the greenback is devaluing against the euro. The US needs to get a larger effective devaluation by getting other currencies revalued. Strange logic, but the might of the rich appears strong, even when their balance sheets look weak.
The Bretton Woods twins also added their voice to the US’s plea for revaluation of Chinese currency. At its recent meeting at Dubai, the World Bank and the International Monetary Fund lent their support to the plea that China should let its currency float and its value be determined by market prices. The fact that China does not have a strong financial system and that revaluation of the remninbi might hurt its exporters and hence the banks, was lost sight of. The Bretton Woods twins’ plea for market forces is short-hand for asking them not to intervene in the markets and buy up the surplus dollars. But the central banks of Asia will find it difficult to prevent their currencies from devaluing if the flood of dollars is left to determine the exchange rate. Intervention and build-up of forex reserves are a necessary part of Asian central bankers’ management of the abundance of riches, which their countries face.
It is a pity that the immediate pressure of US electoral politics has found its echo in the Bretton Woods twins’ support of the US’s stand. The economic reality is that China’s massive exports into the US have led to a loss of jobs in the US’s manufacturing sector. Its corporate organizations think on protectionist lines and feel that China should revalue its currency so as to make its exports costlier in terms of the US dollar. China has been maintaining a steady exchange rate against the US dollar since 1994. The Chinese authorities buy up the excess dollars and this cheapens the Chinese currency. In effect, China is doing today what Japan did in its earlier phase of development, keeping its currency cheap to help promote exports. The US resents China’s success as an exporter and hectors China to change its policy. China has politely refused, pointing out that its financial institutions are weak and a stronger Chinese currency or a float of the remninbi will bankrupt many of its industries and throw its banks into chaos.
In all these pressure tactics, the US has not recognized the role that China’s (and Asia’s) reserves play in sustaining its own economy. The investment of most of the surplus reserves of Asia, of nearly $1,600 billion in US’s gilt-edged securities, is a support to the US economy. Asia is pulling its weight and the US is not left to carry out its adjustment all by itself.
In fact, but for Asia’s central banks investing their reserves in US government securities, the US would have found it difficult to manage its deficit. It would have had to make a heavier drawal on its own peoples’ savings and its interest rates would have risen. It is wrong to say that the world economy is not getting adequate support from Asia. On the contrary, Asia is sustaining the US’s spending splurge — both its military adventurism and its consumer spending.
It is a reflection of the changing power structure of global economies that today the countries of Asia own 70 per cent of the global reserves of foreign exchange, as against 30 per cent in 1990 and 20 per cent in the early Seventies. Of course, Asia may suddenly withdraw this support, which will land the US in deep distress. The geopolitical situation is, however, such that this may not happen. Asia can threaten, but not implement its option of withdrawing reserves from the US financial markets. That there is no safe financial alternative is very pertinent. Unless Asia develops its own credible bond markets, it is forced to invest its surpluses in financing the US’s deficits, both external account and domestic. This is not a sustainable situation for all time. It is necessary that Asian nations recognize their power and use it first for the greater good of Asia’s own people, instead of building houses, maintaining roads and financing the military build-up of richer countries — which borrow to the hilt.
The US is shortsighted in trying to get China to lose its competitive edge by revaluing the remninbi. The provenance of US multinational companies in China is shown by the fact — recently cited by Morgan Stanley — that upto $1,000 billion of the US’s market capitalization belongs to US multinational corporations, who have a manufacturing base in China for exports to their parent country. The US’s efforts to render China less competitive will ultimately hurt its own MNCs, although they will be different from the corporate organizations which manufacture inside the US to sell there. Anyway, the US should beware lest China listens to its advice and revalues the remninbi. It might eventually hurt Wall Street more than the US can find tolerable.
Exchange markets are complicated because of their interdependence. The advice given by the “rich” nations to “the relatively poor” to revalue their currencies flies in the face of economic reality, although temporarily it might help Snow score a political victory in the polls. It is sad that in its pursuit of narrow national interests, the US is forgetting the larger implications of exchange rate management and the interdependence of markets.
Incidentally, Snow may perhaps do a lot of good to China’s Asian competitors, if he succeeds in his campaign. China’s competitors in Asia have been feeling the brunt of the giant’s pricing power. If Snow succeeds in his campaign, he may help the little Tigers of Asia in their competition with China — an unintended consequence of his eager fight for China’s revaluation.
The US’s pursuit of global economic diplomacy shows that its national interests are supreme. China has deflected the attack for the present. China’s response to the pressures of the US and the Bretton Woods twins should help us in India to mould our attitude in case the US turns its “benign” attention to our currency and our exchange rates. For the present, we are no more than a blip on the US’s radar screen — except for back office processing, which has enraged sundry US legislators. But our success as a manufacturer exporter will mean the US will try its “China” tactics on India as well. We should form a compact with China to fend off pressures by US interests to force us to revalue our currency.
Already, our exporters are complaining that the rupee is too strong for their good. The pressure from the US’s economic gurus should not force us to abandon our current policy of containing the rise in the value of the rupee. India and China should together fight this battle. Their interests are common and their concerns genuinely shared. The US’s currency wars should be fought by both India and China with diplomacy and economic counter-attack, but above all, we should use persuasion. Ultimately, the US cannot fail to recognize that India’s reserves do help to sustain its own economic architecture. It would hurt the US to destroy a contributor to its seemingly endless appetite for a cornucopia of riches.
It is, indeed, paradoxical that the richest country of the world depends on contributions from the poorer to sustain its march to greater glory. Earlier episodes of imperialism saw tributes paid by poorer nations to the rich by “force”. Today, the channels of commerce and finance work in devious ways to extract the same tribute. The US’s efforts to alter the terms of finance by revaluing the Chinese currency are in its self-interest, but it does not seem to realize that China’s success holds a key to the US’s “sustenance” in the midst of huge gaps in its external and domestic finance.