[YHReport] Fred Bergsten’s Response to my earlier article:
China’s currency and the US economy
Dear colleagues,
About two weeks ago, I sent around an article on the currency war I
published on WSJ. Professor Fred Bergsten, director of the Peterson
Institute of International Economics in Washington, responded in a
VoxEU column last night (text included at the end of this email for
your reference).
All the best,
Yiping
Yiping Huang
China Macroeconomic Research Center
=====================
China’s currency and the US economy
Fred Bergsten
1 November 2010
Yiping Huang recently argued that the US would not win a
currency war over global imbalances. This column agrees that a
currency or trade war would be lose-lose. But it says that such a
conflict is inevitable unless the root causes of the growing
imbalances are addressed
In a 19 October column on this site, “A currency war the US cannot
win”, Yiping Huang argued that comprehensive policy packages in
China and the US, including but ranging well beyond exchange rate
realignment, are required to achieve the needed global rebalancing.
He also argued that progress is already being made on both counts
(Huang 2010).
Professor Huang is clearly correct on both points. The US must
increase its saving rate, and the household number has risen from
zero before the crisis to about 6% now. China can achieve real
appreciation of its currency by letting wages rise at a rapid pace,
as is now occurring.
Professor Huang is only partially correct, however, in arguing that
the imbalances themselves have improved. To be sure, both the
Chinese surplus and the US deficit were cut roughly in half from
2006/07 to 2009. This was a result of two things. First, the global
recession reduced imbalances, as exports and imports retracted by
roughly equal percentages. Second, with the usual time lag of 2-3
years, the currency realignments of 20%-25% by the dollar during
2002-07 and of the renminbi during 2005-2008. Incidentally,
contrary to Professor Huang’s assertion that I ignore this
progress, I emphasised both improvements in my testimony to the
House Ways and Means Committee and the Senate Banking Committee in
mid-September.1
But the imbalances are now rising sharply again, which is why the
issue has soared to the top of the global agenda. The US global
current-account deficit has moved about halfway back up from its
recent trough of $300 billion to its record high of $800 billion.
China’s global trade surplus over the past several months is more
than 75% above its level of a year earlier and the IMF projects
that its global current-account surplus will continue rising back
to 8% of GDP (about $800 billion, equal to the largest US deficit
to date) by 2015 on the basis of current exchange rates and other
policies. This goes against the rebalancing strategy agreed upon by
the G20, including the leaders of China and the US. It also goes
against the economic needs of both countries, with the US
experiencing slow growth and China expressing deep concern over
overheating. The issue is thus much more urgent, and considerably
more serious, than suggested by Professor Huang.
There are several other major analytical errors in his article that
have an important bearing on the topic. For example, he suggests
that revaluation of the renminbi would not produce net economic
benefits for the US. There would be costs, to be sure, mainly from
higher prices, yet these are not serious in the short to medium
run, however, due to low capacity utilisation and the total absence
of inflationary pressures. On the other hand, my colleague William
Cline has shown that revaluation of even 20% would curb China’s
global surplus by $350-500 billion and reduce the US global deficit
by $50-$120 billion, which would translate into 300,000-700,000
good US jobs (Cline 2010). Under current and foreseeable conditions
of high unemployment and price stability, currency realignment
would thus represent a significant and unambiguous net benefit for
the US economy.
Professor Huang also argues that the Plaza Agreement of 1985 failed
to rectify the contemporary global imbalances, the highest to date
before the current period. To the contrary, again with the usual
lags, the US global deficit virtually disappeared by 1990-91 and
the Japanese surplus dropped very sharply as well. Those imbalances
rose again only when the dollar appreciated sharply, by 40% from
1995 to 2002, and the yen became hugely undervalued in real terms
as a result of the deflation that characterised the Japanese
economy from 1991 forward.
With respect to my own proposal for countervailing currency
intervention, under which the US would sell dollars to offset the
exchange-rate impact of China’s purchases of dollars (Bergsten
2010), Professor Huang is correct that the inconvertibility of the
renminbi makes it impossible to fully offset China’s massive
manipulation. But the US authorities could buy proxies, such as
non-deliverable forwards and renminbi-denominated bonds, to the
extent they are available and send unmistakeable signals to both
the private markets and the Chinese authorities that the time has
come to cease resisting the economic fundamentals. This approach,
which is aimed at filling the crucial absence of effective systemic
responses to chronic surpluses countries that keep their currencies
undervalued (like Japan in the past) and would obviously work
better against convertible currencies, is tailored precisely to the
problem it seeks to address and is far superior to erecting new
trade barriers.
Professor Huang is certainly right that no one would win a currency
or trade war. But the root causes of today’s large and growing
imbalances, especially the Chinese surplus due to China’s huge and
prolonged manipulation of its currency, must be resolved soon or
else such conflict is inevitable. The upcoming G20 summit in Seoul
may offer a “last best chance” to avoid irreversible reactions in
the US Congress and other countries.
References
Bergsten, C Fred (2010), “We Can Fight Fire with Fire on the
Renminbi”, Financial Times, 4 October.
Cline, William R (2010). “Renminbi Undervaluation, China’s Surplus,
and the US Trade Deficit”, Peterson Institute for International
Economics Policy Brief 10-20.
Huang, Yiping (2010), “A currency war the US cannot win”,
VoxEU.org, 19 October.
1 U.S. House. 2010. Committee on Ways and Means. Testimony of C.
Fred Bergsten: Hearing on China’s Exchange Rate Policy. 111th
Congress, 2nd Sess., 15 September and US Senate. Committee on
Banking, Housing and Urban Affairs. Testimony of C. Fred Bergsten:
Hearing on The Treasury Department’s Report on International
Economic and Exchange Rate Policies. 111th Congress, 2nd Sess., 16
September.
