By JOSEPH E. STIGLITZ
THE battle with the United States over China’s exchange rate continues.
When the Great Recession began, many worried that protectionism would rear its ugly head.
True, G-20 leaders promised that they had learned the lessons of the Great Depression. But 17 of the G-20’s members introduced protectionist measures just months after the first summit in November 2008.
The “buy America” provision in the American stimulus bill got the most attention.
Still, protectionism was contained, partly due to the World Trade Organisation.
Continuing economic weakness in the advanced economies risks a new round of protectionism.
In the US, for example, more than one in six workers who would like a full-time job cannot find one.
These were among the risks associated with America’s insufficient stimulus, which was designed to placate members of congress as much as it was to revive the economy.
With soaring deficits, a second stimulus appears unlikely, and, with monetary policy at its limits and inflation hawks being barely kept at bay, there is little hope of help from that department, either.
So protectionism is taking pride of place.
The US treasury has been charged by congress to assess whether China is a “currency manipulator”.
Although president Barrack Obama has now delayed for some months when treasury secretary Timothy Geithner must issue his report, the very concept of “currency manipulation” itself is flawed: all governments take actions that directly or indirectly affect the exchange rate.
Reckless budget deficits can lead to a weak currency; so can low interest rates.
Until the recent crisis in Greece, the US benefited from a weak dollar/euro exchange rate.
Should Europeans have accused the US of “manipulating” the exchange rate to expand exports at its expense?
Although US politicians focus on the bilateral trade deficit with China – which is persistently
large – what matters is the multilateral balance.
When demands for China to adjust its exchange rate began during George W. Bush’s administration, its multilateral trade surplus was small.
More recently, however, China has been running a large multilateral surplus as well.
Saudi Arabia also has a bilateral and multilateral surplus: Americans want its oil, and Saudis want fewer US products.
Even in absolute value, Saudi Arabia’s multilateral merchandise surplus of US$212 billion in 2008 dwarfs China’s US$175 billion surplus; as a percentage of GDP, Saudi Arabia’s current-account surplus, at 11.5% of GDP, is more than twice that of China.
Saudi Arabia’s surplus would be far higher were it not for US armaments exports.
In a global economy with deficient aggregate demand, current-account surpluses are a problem.
Many factors other than exchange rates affect a country’s trade balance.
A key determinant is national savings.
America’s multilateral trade deficit will not be significantly narrowed until America saves significantly more; while the great recession induced higher household savings (which were near zero), this has been more than offset by the increased government deficits.
Adjustment in the exchange rate is likely simply to shift to where America buys its textiles and apparel – from Bangladesh or Sri Lanka, rather than China.
Meanwhile, an increase in the exchange rate is likely to contribute to inequality in China, as its poor farmers face increasing competition from America’s highly-subsidised farms. This is the real trade distortion in the global economy – one in which millions of poor people in developing countries are hurt as America helps some of the world’s richest farmers.
*Joseph E. Stiglitz is a professor of economics at Columbia university and winner of the 2001 Nobel memorial prize in economics. His most recent book, Freefall: Free Markets and the Sinking of the World Economy, is now available in French, German, and Japanese, and will be shortly available in Spanish, Italian and Chinese