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International Economic Games at the G20
By: Dr. Charles Lieberman
Date: 3/30/2009
Chinese government officials have been fairly vocal about wanting the U.S. to defend the dollar's value and keep our budget deficits and inflation down. They have suggested that domestic policy is irresponsible and that they would consider using Special Drawing Rights or some other currency for their foreign exchange reserves. Such gamesmanship notwithstanding, China can sell off its surplus dollars anytime it wishes, but not without driving up the value of the yuan and weakening its own exports, consequences it wishes to avoid. Shifting into SDRs or another reserve currency would not avoid these consequences. So, it appears China's motivations for these comments are more likely political, not economic, especially ahead of the G20 meeting.
China does not buy Treasury securities out of goodwill for the U.S; it buys to avoid exchanging its dollar surpluses for yuan, which would drive up the yuan, weaken the dollar, and weaken China's exports. In fact, U.S. policymakers have for years suggested, implored, begged, and demanded that China allow its currency to appreciate to reduce the trade imbalance between the two countries. For a few years, China did allow the yuan to appreciate. But allowing an appreciating yuan to weaken its own exports in less acceptable in today's weak global economic environment.
Perhaps to avoid criticism at the upcoming G20 meeting, China is trying to focus attention on U.S. budget and financial issues. This is unnecessary, however. The issue for the day at the G20 will be how governments can work together to address the global credit crisis. We would prefer the European Central Bank to lower interest rates more or the Germans to adopt a larger spending program and it would be better for the global recovery is they did so. In fact, governments never do anything they think isn't in their own best interests. These European institutions will balance these larger benefits against their own policy needs and China's stance is a good example of such behavior. Still, the need for expansionary fiscal and monetary policy for domestic needs is obvious to all and expansionary policies are synchronized, even if they are not formally coordinated.
The G20 can also discourage countries from imposing tariffs or quotas, which might be beneficial locally, but very harmful globally. It can also contribute by keeping policy makers focused on the credit crisis, our primary policy issue of the day. Meetings of the G20 will help avoid policy missteps and promote a global recovery somewhat sooner. Talk of replacing the dollar as a global currency is just a sideshow with little relevance.
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