|
|
 Currency war - Clashes escalate crisis
The currency war
threatens to develop into an open trade war, with beggar-my-neighbour
protectionist measures. Currency and trade conflicts will drive the
world capitalist economy into even deeper crisis. Faced with growing
tensions, the G20 leaders are in disarray. LYNN WALSH analyses the
situation.
“WE’RE IN THE midst of an
international currency war…” This complaint came from Guido Mantega,
Brazil’s finance minister, at the recent International Monetary Fund (IMF)
meeting in Washington DC. Brazil is one of the countries that has been
affected by an inflow of speculative capital, pushing up its currency
and undermining its competitiveness on world markets.
Beggar-my-neighbour currency measures were, in fact, the most urgent
issue facing the IMF leaders. No agreement was reached, however, and the
issue was postponed to the G20 summit in South Korea in November. Pascal
Lamy, head of the World Trade Organisation (WTO), warned that growing
currency tensions risked the return of 1930s-style protectionism. He
warned of “a domino effect, where you get a beggar-my-neighbour, or
tit-for-tat, chain and it sours and sours”.
It is unlikely that any
substantial agreement will be reached at the Seoul meeting. As the
feeble ‘recovery’ of the world economy began to falter earlier this
year, major G20 governments turned to ‘fiscal consolidation’, replacing
state stimulus with severe cuts in state expenditure. In a desperate
attempt to promote growth, they have turned towards export markets. But,
as the IMF’s own World Economic Outlook puts it, “not all countries can
have real depreciation and increase their net exports at the same time”.
Some temporary compromise
may be patched up at the Seoul meeting. It will inevitably be temporary,
however, and break down as competition between national economies
intensifies. The US Federal Reserve, for instance, has now signalled
that it intends to implement a new round of quantitative easing,
printing money with the aim, among others, of bringing about a further
devaluation of the dollar to promote US exports. This, as the Chinese
leaders point out, amounts to a unilateral devaluation of the dollar to
promote US interests at the expense of the rest of the world.
In response, the Chinese
regime has restricted the export of rare earths, first to Japan and now
to Germany, the US and other importers. (Rare earths are chemical
elements that are essential to the production of many high-tech
products; China currently controls over 90% of world production.) This
is a signal that China will not passively accept the self-interested
measures of US capitalism.
Britain, moreover, has
announced that it will follow the US example. Mervyn King, governor of
the Bank of England, has announced a new round of quantitative easing,
which is undoubtedly aimed at a further devaluation of the pound in an
effort to promote British exports.
During the last two or
three years, the currency wars and growing trade frictions have been on
the level of warning shots rather than all-out conflict. All the signs
are that this conflict is beginning to intensify: “a currency war… could
lead to disaster if losing countries with expensive exchange rates were
to resort to orthodox trade tariffs – a measure that would be logical,
and might well be politically necessary for them”. (John Authers,
Everyone Will Lose in a Global Currency War, Financial Times, 8 October)
The US threatens
sanctions
IN RECENT MONTHS, the US
has stepped up pressure on China to revalue the yuan (or rmb), though so
far the Obama administration has stopped short of declaring China guilty
of ‘currency manipulation’, a move that would trigger trade sanctions.
With the mid-term elections imminent and unemployment still officially
over 10%, Barack Obama is under intense pressure to curb China’s exports
to the US. This pressure is reflected in a recent op-ed article in the
New York Times by Sherrod Brown, a Democratic senator from Ohio.
“Inexpensive products [from China] might sound nice, but we lose 13,000
net jobs for every $1 billion increase in our trade deficit. Our $226
billion deficit with China has meant shuttered factories, lost jobs and
devastated communities across America”. (17 October) Brown is demanding
“punitive steps in response to China’s unfair trade practices”.
The huge US trade deficit
with China is undoubtedly widely seen by workers as the result of the
Chinese regime’s manipulation of its currency. US corporations, of
course, were only too pleased to relocate their factories in China,
taking advantage of cheap labour and a low-cost environment. Moreover,
cheap imported goods in the United States allowed big business to pay
low wages to US workers. Sooner or later, however, this unbalanced
relationship between debt-financed consumption in the US and low-cost
production in China was bound to become unsustainable.
In September, the US
House of Representatives passed a bill,
supported by Democrats and Republicans, that
would treat imports benefitting from an undervalued yuan as benefitting
from subsidies, subjecting them, according to WTO rules, to anti-dumping
tariffs. (Whether this is really compatible with WTO rules is a moot
point.) To become law, a similar bill
would have to be passed in the US Senate and approved by Obama. However,
the threat of this legislation adds to the pressure on the Chinese
regime at IMF and G20 talks.
Obama has already
accepted a petition from the US steelworkers’ union demanding an
investigation of Chinese government subsidies of green energy exports.
The Chinese government, for its part, counters this allegation with
claims that the US government subsidises green energy products to the
extent of $60 billion and complains that the US government imposes ‘buy
American’ clauses on the public procurement of certain green energy
products.
Obama and his treasury
secretary, Timothy Geithner, at this stage, seem hesitant to formally
declare China guilty of ‘currency manipulation’ – from fear of setting
off a tit-for-tat currency and trade war. The US would prefer to push
the Chinese government into a revaluation of the yuan by stepping up the
pressure on various fronts, rather than declaring open war.
Launching QE2
THE US, HOWEVER, is about
to escalate the currency war on another front. The US Federal Reserve is
about to launch ‘QE2’, a second round of quantitative easing. This new
resort to the printing press is intended, domestically, to increase the
flow of credit into the economy and stimulate investment and consumer
demand. Another aim of this measure, however, is clearly to accelerate a
decline in the value of the dollar.
The US no longer has the
international weight that it had in 1985 when, under the so-called Plaza
accord, it pushed Germany, Japan, Britain and France into an agreement
which allowed a dramatic revaluation of the yen and a rapid (50%)
decline of the dollar. “Significantly,
in the eyes of many countries, the United States has lost some of the
standing it needs to shape global policy. Not only is Wall Street viewed
by many as having initiated the world financial crisis, but also a
number of countries fear that policies by the Federal Reserve are
pushing down the dollar's value – the same kind of currency weakening
for which the Obama administration has criticised China”. (Sewell Chen,
Currency Rift with China, New York Times, 10 October)
This time, the US is
acting unilaterally by printing dollars. Once again, the US is taking
advantage of the role of the dollar as the world’s major reserve
currency to finance investment and pay off its debts in its own
currency.
The dollar has declined
approximately 20% (against a basket of currencies of its main trading
partners) since its 2003 peak, and will no doubt fall rapidly as a
result of renewed quantitative easing. International speculators will
turn away from the dollar as its value falls, thereby accelerating the
decline. The big investors will turn on an even bigger scale to the
so-called ‘emerging markets’, the semi-developed economies like Brazil,
Indonesia, Thailand, etc. The flood of speculative capital (based on
borrowing cheap dollars in a new phase of the ‘carry trade’) will push
up the value of the target currencies, compounding the global currency
tensions.
But what will happen to
the yuan? If the yuan were allowed to float, it would clearly appreciate
against the dollar. But it is virtually ruled out that the Chinese
regime would allow an uncontrolled appreciation of their currency, which
would have a devastating effect on China’s exports. But if it maintains
the peg with the dollar, the advantage for the US of a falling dollar
will be largely cancelled out with regard to China. This last scenario
would almost certainly lead to protectionist measures being adopted by
the US against China’s exports.
In the run-up to the G20
meeting in November, there is intense behind-the-scenes pressure to
reach an agreement for a coordinated realignment of the world’s major
trading currencies, particularly the dollar-yuan relationship. Some form
of agreement may be reached. But any realignment will be temporary: it
will inevitably break down under the pressure of contradictory
developments in the world economy in the next period.
For instance, US big
business, backed by the Obama administration, wants an export-led
recovery (given the weakness of consumer demand under conditions of a
huge credit overhang and mass unemployment at home). However, this will
not be achieved merely by a realignment of currencies. Under
globalisation, deindustrialisation in the US has been in progress for
three decades. Many consumer goods are no longer produced in the US. An
export-led recovery would require massive investment (in the face of
global overcapacity and weak profitability) and structural changes in
the US economy. At the very least, it would take a period of sustained
investment and growth to achieve such a reorientation.
There is also the problem
that all the main industrial or semi-industrialised economies are trying
to achieve recovery through export-led growth. There is a fundamental
problem of overcapacity and shrinking demand, which will be intensified
by a reduction of US demand for imports (as the falling dollar makes
them less affordable). The role of US capitalism as the ‘market of last
resort’ was a crucial factor in global growth since the mid-1990s. A
weak US market will have a devastating effect on the world economy.
There is also the problem
that the US has depended on China to finance its massive debt, both its
federal government deficit and the accumulated trade deficit.
China has accumulated $2.45 trillion of
foreign currency reserves (65% in dollars, 26% in euros). China is the
biggest holder of US government bonds (with $843.7bn) and altogether
holds a total of $1.5 trillion in US securities of all kinds (bonds,
shares, etc).
US leaders may hope that
they can find new creditors and also reduce the US’s external debts.
However, as the dollar falls, US financial assets (whether federal
government bonds or company bonds) will become much less attractive
investments. Moreover, a rapid reduction of the external debt would
imply a sharp contraction in the US economy, which would counteract the
effect of increased exports (if that were achieved).
Given the international
role of the dollar (which is not likely to be replaced by the euro or
any other currency in the foreseeable future), QE2 gives the US a
powerful weapon. There is no doubt, however, that US leaders are wary of
retaliation from China and other countries. As a warning, the Chinese
regime recently displayed its ruthlessness in a dispute with Japan. The
immediate issue was the arrest of the captain of a Chinese vessel by the
Japanese authorities, for allegedly entering Japanese territorial waters
around the disputed islands of Senkaku/Diaoyu. China retaliated by
halting the export of rare earths to Japan, essential materials for many
electronic products. In the scale of things, this was a minor spat.
Nevertheless, it reflects the underlying struggle for economic dominance
and regional strategic power, factors which undoubtedly come into play
in the currency/trade conflict.
China hits back
THE CHINESE REGIME
rejects the idea that China is to blame for the imbalances in the global
economy. In particular, it dismisses claims that China’s ‘excess’
savings or the weakness of its domestic market are the primary cause of
the US’s international trade deficit, and its ever-growing bilateral
deficit with China (now over $200bn a year). The US’s problems,
according to the Chinese leaders, are self-inflicted, a result of
‘excessive’ credit and, more recently, an ultra-loose money policy,
which is increasingly destabilising the global economy.
In fact, China and the US
represent two sides of a contradictory relationship: with credit-driven
consumption in the US (producing a growing federal deficit and massive
trade deficit), on the one side, and an export-driven economy on the
other, with China using its huge accumulated foreign currency surpluses
to finance US debt. This imbalanced relationship clearly cannot be
sustained indefinitely. Conflict over the global currencies is not a
failure of coordination but a symptom of this antagonistic relationship.
The Chinese regime has
followed a policy of export-led growth, with an undervalued yuan as a
key part of this strategy. An undervalued yuan makes China’s exports
cheap for US, European and other markets, while making imports more
expensive, thus limiting the growth of domestic consumer spending. For
years, China has effectively pegged the yuan to the dollar, thus
frustrating any gain for US exporters to China as the dollar falls. The
de facto yuan-dollar peg also strengthens China’s competitive position
against other semi-developed economies, whose currencies have
appreciated against the dollar in the recent period.
It is claimed that the
yuan is currently 20-40% undervalued. The Chinese government has played
a cat-and-mouse game with the US, continually promising reforms (with
the prospect of a gradual yuan revaluation) but continually
prevaricating. In June, China took the yuan off the dollar peg. However,
it has risen in value since then by less than 2%, as China has been
buying dollars, euros, etc, to prevent a big appreciation.
Instead of using its huge
profits from foreign trade to develop the home market and raise the
living standards of workers and farmers, the Chinese regime has hoarded
its foreign currency earnings, separating them from the internal
economy. It has used its reserves to buy US dollar assets, particularly
US government bonds, which effectively is a key support for the
continued credit-driven US economy.
During the global
downturn in 2008-09, the Chinese regime massively increased state (or
state-financed) stimulus packages, particularly in infrastructure
projects. This policy was undoubtedly a crucial factor in maintaining
the high growth rate in the Chinese economy (which, in turn, partially
cushioned the global downturn). China’s massive stimulus package has had
a significant effect both at home and on the world economy.
The Chinese leaders are
far from abandoning their export orientation. They saw the massive
intervention at home as a temporary expedient pending the revival of
exports to the US, Europe and the rest of the world. No doubt they would
like to see a more balanced development, with stronger growth of the
domestic economy. However, the orientation of the economy has structural
dimensions, which cannot be rapidly changed.
Above all, the regime
fears social upheaval unless it can guarantee continuous growth and
avoid mass unemployment. Visiting Europe for the recent IMF meeting, the
Chinese prime minister, Wen Jiabao, delivered a clear warning to western
leaders: “Do not work to pressurise us on the renminbi rate”. Chinese
export companies, he said, have very small profit margins, which could
be wiped out by US protectionist measures. “Many of our exporting
companies would have to close down, migrant workers would have to return
to their villages”, Wen said. “If China saw social and economic
turbulence, then it would be a disaster for the world”. (Financial
Times, 6 October)
At the same time, the
governor of China’s central bank, Zhou Xiaochuan, warned the IMF meeting
that the focus on currencies was one-sided. “The continuation of
extremely low interest rates and unconventional monetary policies
[meaning quantitative easing] by major reserve currency issuers have
created stark challenges for emerging market countries in the conduct of
monetary policy”. Among other things, the flood of speculative capital
into commodity-exporting economies has pushed up the price of raw
materials for Chinese industries.
Faced with intensified
pressure from the US (with the prospect of protectionist trade measures
in the coming months), the Chinese regime has shown that it will not
passively accept sanctions, but will pursue its own counter-measures.
For instance, China recently began to buy yen, which pushed up the value
of the Japanese currency. This pushed up the prices of Japanese exports
on world markets, with serious consequences for the export-oriented
Japanese economy. To try to mitigate this effect, the Bank of Japan
began buying up US dollars. (Selling yen tends to lower the exchange
value of the yen, while buying dollars should push up the value of the
dollar.) However, even though the Bank of Japan spent many billions of
yen in this operation, it failed to have more than a very temporary
effect on the parities of the yen and the dollar.
China’s action in
September, however, was a warning of future manoeuvres in the event of
an all-out currency war. Buying US dollars to keep down the value of the
yen, Japan was “in effect doing China’s currency manipulation for it.
China gets a more diversified portfolio, insurance against any fall in
treasuries, and still gets its near-term goal of a continued strong
dollar and the exports in jobs that means”. (James Saft, China Runs
Circles Around Adversaries, Reuters, 5 October) In other words, Japan
gets the blame for currency manipulation and bears the losses when the
dollar falls again.
Moreover, while in Europe
for the IMF meeting, Wen announced that China would be buying more euro
bonds, including Greek government bonds. China, he said, was interested
in supporting the stability of the euro. However, the real motive is
undoubtedly to prevent a massive fall in the value of the euro, which
would strengthen eurozone competitors against China.
Dangerous bubbles
IT IS SIGNIFICANT that
the most outspoken warning of a currency war came from Mantega, Brazil’s
finance minister, and from other leaders of so-called ‘emerging
markets’, the semi-developed countries of the neo-colonial world.
Following the downturn in the advanced capitalist countries, there has
been a flood of capital into these economies. Their growth rates have
been higher than the advanced economies, to a large extent sustained by
China’s demand for raw materials. Cheap credit in the advanced
countries, expanded by quantitative easing, has produced a wave of
speculative investment in the semi-developed countries, where interest
rates and profits are currently higher than in the advanced capitalist
countries. Potentially dangerous bubbles are clearly developing.
At the same time, the
flood of capital is pushing up the value of these countries’ currencies,
making their exports less competitive. The currency appreciation,
complained Mantega, “threatens us because it takes away our
competitiveness”. Indeed, the semi-developed economies that have
weathered the great recession (largely on the basis of foreign
investment and China’s demand for raw materials) will face their own
crisis in the next period.
The semi-developed
economies piled up foreign currency reserves after the 1997 Asian
currency crisis as so-called ‘self-insurance’ against any renewed runs
on their currencies or their credit. Reserves were generally reduced
during the 2008-09 downswing, as governments increased state expenditure
to counter the effects of world recession, but they have since recovered
and exceeded previous levels.
Different countries have
resorted to various measures to counter currency appreciation. Some,
like Chile, South Korea and Indonesia have imposed capital controls and
taxes on inward investment. Others, like Brazil, have been intervening
in currency markets, buying dollars with their own currency in an effort
to limit appreciation of their currency.
Such intervention,
however, has only a limited effect. Without agreement between the
advanced capitalist countries and the major semi-developed economies, it
is impossible to establish any kind of stability merely through
intervention in the markets. The global situation is much more complex
than in 1985 when five major powers agreed, under the Plaza accord, to
bring about a revaluation of the yen and the devaluation of the dollar.
Over $4 trillion flow
across the world’s foreign exchanges every day, according to the Bank
for International Settlements’ latest triennial survey. This is a 20%
increase over April 2007, in spite of the downturn in the world economy.
It is impossible for national governments to intervene on a big enough
scale, and for a long enough period, to bring about any lasting
realignment of currencies. China has partially insulated itself by
maintaining strict capital controls and maintaining its foreign currency
reserves outside the domestic economy. On the other hand, the US is now
planning to bring about a massive, unilateral devaluation of the dollar
through a new round of quantitative easing.
At present, the measures
to counter adverse currency alignments (whether through controls or
intervention) are mostly defensive – aptly described as ‘competitive
non-appreciation’ – attempts to protect national economies against
global trends. At a certain point, however, currency measures will give
way to open protectionism, with a resort to import controls (through
quotas or tariffs or a combination of both). The current phony currency
war, unless there is a real recovery in the world economy (which seems
unlikely at the moment), will turn into a more bloody conflict, paving
the way in turn for open protectionism. Such a development would
represent a new stage in the development of the world crisis of
capitalism.
It didn’t work
“IT WORKED!” AFTER the
Pittsburgh summit (September 2009), the G20 leaders congratulated
themselves that, through ‘co-ordinated’ state bailouts of the banks and
stimulus packages, they had avoided a catastrophic slump. It was a case,
however, of parallel action rather than co-ordination. Having avoided
another ‘great depression’, most of the major capitalist economies are
now striving to sharply reduce the fiscal deficits produced by the
downturn and emergency state measures. Stimulus has been replaced by
austerity (so-called ‘fiscal consolidation’), which has already slowed
the growth in the advanced capitalist countries, threatening a
double-dip recession, or worse.
With retrenchment at
home, the capitalist governments are seeking growth through exports, all
competing for the same limited markets. The ‘co-ordination’ of last year
has been replaced by competitive devaluations and creeping
protectionism. Without a marked recovery of the world economy, which
does not appear to be likely, the current currency wars will escalate
into trade wars. This is already indicated by the protectionist threats
by the US administration and Congress and the retaliatory measures by
China (restricting the exports of rare earths to Japan, the US, and
Germany).
No doubt, capitalist
leaders fear a return to the protectionism of the 1930s, which strangled
world growth (at a time when national economies were less interconnected
than now). A period of weak, fragile growth (with a weak business cycle)
will bring increased competition between rival capitalists, with the
ruthless pursuit of national interests – inevitably bringing more
beggar-my-neighbour measures. This is the brutal logic of capitalism.
But protectionism, whatever form it takes, will not provide a way out
for capitalism. On the contrary, it will drive the system even deeper
into crisis.
|