Avoiding the trade spiral

The powerful voice of Fred Bergsten, head of the influential Peterson Institute in Washington, has joined the chorus demanding revaluation of the RMB: by 25-40 per cent. 

Appearing before Congress, Bergsten hit all the hot-issue buttons. He accused China of 'blatant protectionism' and of being a clear 'manipulator'. But the winning argument was that an appropriate revaluation would add 600,000–1,200,000 'mainly high-paying manufacturing' US jobs. This, he noted, would be a cost-free way of addressing the US unemployment problem.

Bergsten's Action Plan for prompting China to revalue its currency seems more confrontational than persuasive. Step one: the US formally declares China to be a manipulator. Step 2: the US harnesses enough votes in the IMF (where the governance is still so Euro-centric that Holland and Belgium alone have more votes than China) to get the IMF to lean on China. Third, to do the same in the WTO, seeking 'remedial action' in the form of countervailing tariffs imposed on Chinese exports.

Let's accept Bergsten's argument that 'the case for a substantial increase in the value of the renminbi is clear and overwhelming'. Let's not even quibble with the luminously rosy scenario that this would fix the US's external and internal imbalances. The issue is tactics. Will Bergsten's 'naming and shaming' approach persuade the Chinese to see the error of their ways?

Bergsten says his recommended response will not trigger tit-for-tat protectionism, because it is actually 'anti-protection'. Semantics, however, are not the issue. Will the Chinese authorities see it Bergsten's way or react by restricting their own imports? Still hanging over world trade is the spectre of Kindleberger's cobweb diagram (above; source here), recording the downward spiral of world trade in the 1930s.

One reason why some Asians are reluctant to see the US join regional arrangements is that US diplomacy can sometimes use the battering ram rather than patient persuasion.

 Photo by Flickr user John "K", used under a Creative Commons license.