The Multilateral Vacuum
If Washington can't get the Chinese to revalue their currency, can international institutions be of any help?
If there is one thing the world seems to have in abundant supply, it is institutions to coordinate the global economy. This is, in part, because old ones never die; they just set their meetings to occur on the sidelines of the shiny new institutions' gatherings. Somewhere in the alphabet soup of institutional acronyms -- WTO, G-7, G-20, IMF -- it would seem there might be one that could prompt China to revalue its currency. Certainly, Washington's had little luck on its own.
If there is one thing the world seems to have in abundant supply, it is institutions to coordinate the global economy. This is, in part, because old ones never die; they just set their meetings to occur on the sidelines of the shiny new institutions’ gatherings. Somewhere in the alphabet soup of institutional acronyms — WTO, G-7, G-20, IMF — it would seem there might be one that could prompt China to revalue its currency. Certainly, Washington’s had little luck on its own.
The challenge is a stiff one. But international economic coordination can sometimes work nicely in resolving such issues. It can help countries escape from an economic prisoner’s dilemma — with each withdrawing tariffs, for example, for mutual gain. The institutions can allow countries to share experiences about which policies have worked and which have fallen short. Or the gatherings of leaders can imbue participants with a sense of accountability for the global repercussions of their domestic actions.
China’s undervalued currency fits awkwardly into the prisoner’s dilemma framework. There is a strong case to be made that China has been the chief victim of its renminbi policy. It is left with trillions of dollars’ worth of foreign exchange reserves on which it looks increasingly likely to take significant losses. The domestic economic adjustment challenges that looked too daunting for China to tackle a few years ago appear even more daunting now. Adding to the concerns, the undervalued renminbi has contributed to a lack of monetary control that has sparked inflation within China.
All these reasons should drive unilateral action on China’s part. But any such action has been slowed by domestic political concerns within China. Could an international bargain help overcome those? It’s possible. The setting bears some resemblance to trade liberalization, in which countries may be able to forswear counterproductive policies — such as voluntary export restraints — while proclaiming political victory because others joined the bargain: "Yes, we have agreed to stop shooting ourselves in the foot, but everyone else will be forced to stop as well!"
This sort of deal was on offer from U.S. Treasury Secretary Timothy Geithner in G-20 talks a year ago. Countries holding major trade surpluses and deficits would have agreed to get their houses in order. China would have had to make politically painful adjustments, but could have claimed that it had won promises of U.S. fiscal rectitude as part of the bargain. In the end, neither China nor Germany seemed to find this offer of foreign pressure politically useful, and the effort got bogged down in a tedious set of negotiations aimed at defining the problem.
There was a time when it seemed plausible that international sharing of economic knowledge and experience could help sway Chinese currency policy. That now seems like another casualty of the global financial crisis, an episode that Chinese leaders seem to believe they won and the West lost. Whether or not the financial crisis renders subsequent Western analysis suspect, Chinese hubris means the advice is unlikely to meet a receptive audience.
But maybe China, as an emerging power, feels obliged to do its share to set the global system aright? This was the thrust of the "responsible stakeholder" policy espoused by World Bank President Robert Zoellick when he served as U.S. deputy secretary of state. No sign of this yet. China remains reluctant to take on either the rights or responsibilities that go with such a leading role. Incongruously, China’s leaders seem to want to treat the country’s large external imbalances as a purely domestic problem and just be left alone.
Beijing can only dig its head in the sand for so long. Powerful economic forces will compel China to take a different approach to renminbi valuation sooner or later. A prudent policy for the United States might be to wait it out and focus its diplomatic energies on more fruitful directions, such as addressing China’s objectionable policies on intellectual property and investment. But patience and prudence can be in short supply amid a sour economy and fractious politics. If there is a political imperative to apply international pressure to accelerate appreciation of the renminbi, what do the different institutional vehicles have to offer?
The International Monetary Fund (IMF) has the most obvious jurisdiction. It was created to help resolve problems with currencies and imbalances. IMF chiefs have spoken publicly of renminbi undervaluation. But there are two big obstacles to moving beyond pure talk. First, the IMF leadership acts only with the consent of its governing board. Recent restructuring moves have aimed to augment China’s power on that board, in recognition of its growing economic stature, which obviously puts constraints on how confrontational the organization is likely to be. Second, the IMF’s leverage comes primarily through threatening to withhold loans from wayward countries. China is making loans, not seeking them. The IMF can do little more than scold.
What about the World Trade Organization (WTO), which has jurisdiction over trade concerns? Indeed, critics of Chinese exchange rate policies mostly care because of the distortions a cheap renminbi causes in trade flows. And language in the WTO agreements warns against using exchange rate policies to negate promises of trade openness. Further, the WTO has one of the more effective dispute resolution schemes on the global scene. So why not press a case? It only looks like the right place. The organization has little competency on currency matters, and the language in the agreements is exceedingly vague. If presented with a case, the WTO would be faced with an unappealing choice: It could side with China and appear ineffectual, or it could side with the United States and make up critical new rules in a thoroughly arbitrary fashion.
Are bilateral discussions with China the way to go? The latest high-level incarnation of this three-decade-long conversation is the U.S.-China Strategic and Economic Dialogue. It would hardly be a novelty to raise exchange rate concerns in this context; they have been a prime topic of discussion since well back in President George W. Bush’s administration. Although China did adopt a gradual currency appreciation policy in 2005 and then again in 2010, there is little evidence that U.S. bilateral pressure played a decisive role. When the issue is raised in a bilateral context, a couple of difficulties arise. First, Chinese leaders are inclined to interpret U.S. concerns as misdirected reflections of U.S. domestic political pressures, rather than legitimate efforts to rebalance the global economy for the greater good. Second, bilateral talks raise the specter of great-power competition. It’s no surprise that Beijing may wonder whether Washington is really looking for mutual benefit or whether it is trying to suppress a budding rival.
Could the G-20 then be the Goldilocks institution? It would seem custom-designed to address this issue. Barack Obama’s administration lauded the forum for a membership that reflected new global economic realities. Most notably, it brought China to the table whereas its predecessors, the G-7 and G-8, did not. And global rebalancing featured prominently in the G-20’s post-crisis agenda. This worked well, so long as the pledges were sufficiently vague. But as soon as the United States moved to translate the vague pledges into obligations and actions, it encountered stiff resistance. In the end, the only real leverage the G-20 offers is the possibility that a single country holding out from an international consensus might be isolated and shamed. China was saved from such a fate when Germany joined in objecting to disciplines on surplus countries.
The short answer is that none of above is the perfect setting to resolve or mitigate this complicated dispute. And the United States shouldn’t try to fit a square peg in a round hole. The danger with pressing action through one of these institutions, despite the frailties described above, is that the effort could end up damaging a body that might still be very useful for other, less demanding tasks. One could argue that has already occurred with the G-20, given the weak results from efforts at global rebalancing] To twist a quote from Abraham Lincoln, it is better to leave well enough alone as an international economic institution and have everyone suspect you of impotence than to take on China and remove all doubt. We may be awash in acronymic organizations, but right now, none are well-situated to take on the renminbi.
Phil Levy is the chief economist at Flexport and a former senior economist for trade on the Council of Economic Advisers in the George W. Bush administration. Twitter: @philipilevy
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