The New Rules: Defusing the Global Currency War

The New Rules: Defusing the Global Currency War

After having cooperated to an unprecedented degree -- on stimulus spending and new bank rules, for instance -- to avoid a global meltdown these past two years, the world's major economies now appear ready to turn on one another with truly self-destructive vengeance. Poorly informed Americans are increasingly convinced that free trade pacts -- and not our uniquely high corporate tax rates -- are responsible for sending jobs overseas, and they want to see China punished with tariffs on its imports for its undervalued currency. With China's neighbors intervening heavily to keep their own currencies from rising too high in response, global chatter about the unfolding "currency war" has reached a fever pitch. Is this any way to manage a tenuous global economic recovery?

If that weren't enough, China's growing diplomatic hubris, its deliberate maritime belligerence in the South China Sea, and its all-too-predictable response to the awarding of the Nobel Peace Prize to jailed democracy activist Liu Xiaobo makes for a ready-made villain for everything that ails a freaked-out America. Unfortunately, none of America's problems will be solved by a Smoot-Hawley redux -- especially one aimed directly at its "banker."

It would be easy to write this all off as "a failure to communicate" -- easy, and incorrect. To the contrary, both sides have been pretty clear on what they seek: America wants a rebalancing of the global economy that allows it to double its exports, pronto, and believes a truly convertible renminbi -- meaning one whose value naturally rises in response to heightened international demand -- is the fastest path to that desired outcome. China seeks to shift its economy from export-dependence to domestic consumption and to make the renminbi truly competitive to the dollar as a global reserve currency.

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