A clash of the titans could hurt us all – Fred Bergsten

From The Financial Times (Sub Required):

The US and China have been chief locomotives of global growth for several years. With exchange rates calculated at purchasing power parity, they are the two largest economies. They rank first and third among trading nations.

An economic clash would thus be extremely costly for the world economy as well as for the two countries. Yet such a clash is now virtually inevitable and could occur as early as this autumn. Preventive actions, especially a much larger revaluation of the renminbi and a joint US-China initiative to revive the Doha round of global trade negotiations, are needed to head off this additional substantial risk to global prosperity and stability.

……The US administration, despite its desire to work with China on North Korea and other issues, will have to adopt a tougher position to avoid such developments on the Hill. The treasury department will almost certainly label China a “currency manipulator” in its report to Congress in October, a justified charge in light of China’s massive intervention to keep the renminbi from rising for the past four years, after which it must produce a meaningful remedy; if it does not, Congress will take matters into its own hands.

Pre-emptive measures are needed to head off these risks, hopefully in preparation for or during the visit to Washington next month by Hu Jintao, the Chinese president. The most important is for China to revalue by a meaningful amount, using its large budget surplus to stimulate domestic demand to offset any adverse effect on growth. A 10 per cent revaluation is needed simply to offset the renminbi’s decline over the past three years. A 25 per cent increase, if mirrored by other Asian countries, would take $100bn off the US current account deficit and cool much of the congressional hostility for now. The US, for its part, must initiate a serious programme to increase ¬≠domestic savings and thus sharply reduce its reliance on foreign capital, chiefly by restoring the budget surpluses of five years ago.

To regain positive momentum on trade, China should indicate willingness to liberalise further, though it already has the lowest import barriers of any large developing country. It could best do so by joining with the US to provide needed stimulus to the Doha round through offering substantial reductions in their remaining agricultural and other trade distortions. The US could encourage such co-operation by offering to treat China as a “market economy” at least in sectors that meet that test. Failure to take such steps will trigger large risks for the world’s two growth locomotives themselves, for relations between them and for the ¬≠global economy.

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