The Dog That Didn't Bark Opens One Eye
The Obama campaign spent more time and energy on foreign policy than is typical, particularly for a Democrat. It’s especially striking, therefore, that nearly all of this energy and time was devoted to what we might call the Atlantic world (Europe, Africa, Middle East) and nearly none of it to the Pacific world. The same bias was notable in the Inaugural. Obama seems to have a pretty clear set of views on Iraq, Iran, Pakistan – the “arc of crisis” region. You can agree or disagree with those views, but he’s reasonably well laid out what they are. But what is the Obama Administration’s view of America’s most important bi-lateral relationships – the trans-Pacific relationships with China and Japan?
China was the dog that didn’t bark in the Bush Administration. Before 9-11, there was a bit of a reason to fear (or hope, if you’re Bill Kristol) that the Bush Administration was gearing up for a confrontation with China. There was that business about committing to the defense of Taiwan, the incident with the American pilot being forced down – little things, but they could have been signs of something more ominous. But as things played out, trans-Pacific relations were quite tranquil. If you’re on the left, that’s because of benign neglect – Bush was too busy screwing up the rest of the world to screw up our relationship with China. If you’re on the right, that’s because America’s wars in Afghanistan and Iraq had a “sobering” effect in Beijing. Wherever you are, though, it’s notable that the dog didn’t bark.
Well, the Obama Administration appears to be coming in with no particular plans or perspective on China. This has James Fallows nervous that Geithner is going to needlessly antagonize China, that Congress is going to demonize them for our economic woes and respond with protectionism, accusations of currency “manipulation,” etc. I’m kind of worried about the opposite.
What’s kept Sino-American relations on an even keel all these years, after all, has been profound mutual interest. China’s export-led development path meant keeping their currency artificially low, and their living standards artificially low as well, by investing their surplus national savings in Treasuries. As a result, we owe them a lot of money. But, unlike your typical global deadbeat, we owe it to them in our own currency, which means the lender has far less power to put the screws on the borrower, as the borrower can always respond by trashing the currency. Not only was it in the Chinese interest to keep the game going because it benefitted their export industries, it was in their interest to keep the game going to protect the value of their enormous investment in dollar-denominated assets.
Now, though, with the deepening global economic crisis, China is going to be spending a lot more of their savings at home rather than shipping it overseas. If they cannot count on the American consumer, they will need to reinvent him. That will necessarily mean a significant revaluation of the Renminbi upward against the US dollar. It’s in both Chinese and American interest for this revaluation to take place in an orderly fashion rather than see a sudden collapse of the dollar. But that will not be an easy thing to pull off (currency devalutations rarely are).
Geithner’s comments are concerning not because they suggest he doesn’t know how to talk nicely to China. They are concerning because they suggest that he doesn’t know where the biggest risk to America lies – not in the risk that China will try to keep the Renminbi weak, but that it will be unable to stop it from rising way too fast. In other words, the risk is not that America will annoy China by calling them “manipulators” of their currency but that they’ll decide to give us what we ask for and stop “manipulating” their currency.
And it’s concerning because if the fundamental drivers of the trans-Pacific relationship are unraveling, then we need a really good team in place to manage that transition. And I trust James Fallows: if he doesn’t think they’ve got a good team in place (apart from the Energy Secretary), they probably don’t.
I’m a huge Fallows fan, but I think he’s way overreacting on the Geithner “manipulation” comment. It needs to be read in the context of his audience (Senators) and in the context of the rest of his remarks. Drezner provided additional relevant quotes, and I agree with Drezner’s view.
I am certain that Geithner doesn’t think exchange rates ought to be the centerpiece of the China-US economic relationship. He explicitly says that they’re only part, and not the most urgent part, of what needs to be discussed with the Chinese. He’s been deeply involved from all angles in the matter for the past decade and most recently has been the person with responsibility for open market operations, so better than almost anyone appreciates the significance, complexity and sensitivity of the relationship.
Would China and the world have been better off today if China had moved to manage its currency a few years sooner as many recommended? Almost certainly yes. And the exchange rate regime it selects to pursue is one of several variables it will have to address as it works its way through the next couple of years. It’s going to be a considerable challenge for Chinese policymakers to adopt a set of coherent and effective policies that are both good for China and that fit with the global rebalancing that’s needed in order to shift the world economy to a more sustainable set of global trade and capital flows. And that’s what I read Geithner as saying he intends to work with the Chinese to produce.
Since you don’t allow html — Drezner’s post is on foreignpolicy.com, Jan 22.
— nadezhda · Jan 27, 01:39 AM · #
Just to add to the above: Fallows hasn’t called out the Obama team as you are implying. He did overreact to the Geithner remark; but he loves Summers and has had good things to say over all of the picks to date. He also hasn’t made any substantive noises about Geithner before this flap.
— Rhoda · Jan 27, 09:38 PM · #
Let me be clear: I like Geithner. He was my preferred pick for Treasury Secretary. But I do think Fallows is calling out the Obama team as I described. Here’s Fallows describing his own thoughts:
I noticed the same thing during the campaign: this was a campaign with a lot more seriousness about foreign policy than usual, and it had a decidedly Atlantic orientation (assuming you count Southwest Asia as an extension of the Atlantic world, which I would be inclined to do).
In any event: Fallows is clearly a friend of the Administration and very knowledgeable about China. If he’s anxious about this, other friends of the Administration – of whom I count myself one – should be vigilant.
— Noah Millman · Jan 27, 11:02 PM · #
I think the administration would also do well to pay more attention to Latin America. It seems one area where engagement might bring substantial benefits, given Obama’s popularity there and the relative lack of issues that could undermine it substantially (in contrast with East Asia, SW Asia, and Europe).
— Zak · Jan 28, 02:44 PM · #