Daniel W. Drezner

The dogs that are not barking in dollar diplomacy

Following up on my dollar post from earlier this week, I see that Paul Krugman is talking a related issue in his New York Times column today — the refusal of the renminbi to depreciate against the dollar: Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage ...

Following up on my dollar post from earlier this week, I see that Paul Krugman is talking a related issue in his New York Times column today — the refusal of the renminbi to depreciate against the dollar:

Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China’s insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.

Although there has been a lot of doomsaying about the falling dollar, that decline is actually both natural and desirable. America needs a weaker dollar to help reduce its trade deficit, and it’s getting that weaker dollar as nervous investors, who flocked into the presumed safety of U.S. debt at the peak of the crisis, have started putting their money to work elsewhere.

But China has been keeping its currency pegged to the dollar — which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.

Krugman then goes on to excoriate the U.S. Treasury department for not upbraiding the Chinese more on this. 

Fair enough, but the thing is, the United States is not the country that’s hurt the most by this tactic.  It’s the rest of the world — particularly Europe and the Pacific Rim — that are getting royally screwed by China’s policy.  These countries are seeing their currencies appreciating against both the dollar and the renminbi, which means their products are less competitive in the U.S. market compared to domestic production and Chinese exports

This leads to the title of this post.  Krugman presumes that the U.S. has the strongest incentive to talk to China about this issue.  If one thinks of the U.S. acting as the hegemon, that’s possibly true.  As a matter of direct economic interest, however, why haven’t the Europeans and East Asians been screaming bloody murder about this?  China’s policies are forcing them to take actions they don’t want to take — so why aren’t they complaining more loudly about this? 

Why? 

Daniel W. Drezner is a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and the author of Theories of International Politics and Zombies. His latest book is The Toddler in Chief. Twitter: @dandrezner

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