For years, the US has protested China’s policy of keeping the value of its currency artificially low to boost exports and gain a competitive edge over domestic production throughout the West. Until recently, the US had a coalition of allies at the G-20 to stand firm against the manipulation of the yuan. However, much to Barack Obama’s shock, they’re not as interested in scolding China for manipulating its currency while the Obama administration has done the same with its second round of “quantitative easing”:
Leaders of 20 major economies on Friday refused to endorse a U.S. push to get China to let its currency rise, keeping alive a dispute that has raised the specter of a global trade war amid criticism that cheap Chinese exports are costing American jobs. …
The biggest disappointment for the United States was the pledge by the leaders to refrain from “competitive devaluation” of currencies. Such a statement is of little consequence since countries usually only devalue their currencies — making it less worth against the dollar — in extreme situations like a severe financial crisis.
The AP report takes six paragraphs to explain why the G-20 essentially laughed in Obama’s face:
The crux of the dispute is Washington’s allegations that Beijing is artificially keeping its currency, the yuan, weak to gain a trade advantage. But the U.S. position has been undermined by its own recent policy of printing money to boost a sluggish economy, which is weakening the dollar.
The G-20’s failure to adopt the U.S. stand has also underlined Washington’s reduced influence on the international stage, especially on economic matters. Obama also failed to conclude a free trade agreement this week with South Korea.
Yes, it does make it difficult to get allies in an effort to stop China from manipulating its currency to gain advantage on exports when we’re explicitly doing the same thing ourselves. The G-20 didn’t do much before now anyway to fight back against China, but at least they gave the effort lip service. With the Obama administration attempting to undermine the Eurozone on exports, even that modicum of support has evaporated.
The G-20 just delivered a big message to Obama, which is that American leadership on economics is sailing away on the QE2. Did he get the message? Not exactly. Obama tried to spin this into some sort of victory, saying that “sometimes we’re going to hit singles” rather than home runs. This was neither; it was a whiff.
As the AP makes clear, it was a bad omen, and perhaps the echoes of a larger disaster:
The dispute over whether China and the United States are manipulating their currencies is threatening to resurrect destructive protectionist policies like those that worsened the Great Depression in the 1930s. The biggest fear is that trade barriers will send the global economy back into recession. A law the United States passed in 1930 that raised tariffs on imports is widely thought to have deepened the Great Depression by stifling trade.
Instead of a Smoot-Hawley on tariffs, we may get a currency war that ends up having the same effect. The US just threw gasoline instead of water on those embers. We’ll have to rest our hopes on the equanimity and good sense of the Europeans and pray they don’t follow suit.