Sunday, October 31, 2010
China’s artificially cheap exports are flooding foreign markets, undercutting industries, threatening the global recovery, and angering many. Beijing has resisted demands to allow its currency to rise against the dollar.
A new proposal could offer a way out. The Obama administration, which has been trying to rally pressure on Beijing, is calling on the world’s largest economies to agree to a target for the size of their trade imbalances.
At a meeting of finance ministers of the Group of 20 leading economies, the United States proposed that deficits or surpluses in a country’s current account — the trade balance and some financial transactions — should be brought under 4 percent of G.D.P., by 2015.
This country’s current account deficit amounts to 3 percent of its G.D.P. Still, a 4 percent target could help reduce the world’s largest imbalances. China’s surplus is 5 percent of its G.D.P.; Germany’s surplus is 6 percent.
These huge surpluses mean exports from China and Germany are hogging demand in other countries. As consumer spending falters in deficit countries, including the United States, surplus countries must start buying more of their own, and others’, products.
Some countries balked at the number. The group agreed in principle, and China has signed on so far.
Focusing on its surplus wouldn’t mean that China’s currency manipulation was off the hook. To meet the target, it would have to let the renminbi rise to increase its imports and temper export growth.
But the new goal acknowledges that China also has other tools to increase spending at home, improve the lives of its people, and reduce external imbalances. It could raise wages and deploy some of its mountain of reserves to pay for long-neglected social spending on health care, education and pensions.
A declining Chinese surplus will not close the American current account deficit.
That mainly requires Americans to save more of their income. The change would increase China’s demand for imports from America and others. Countries that have cheapened their own currency to protect themselves from China could let their currencies rise and draw more American imports too.
Putting targets on deficits and surpluses might put some nations in a straitjacket. And there is no enforcement mechanism. Still, reframing the problem this way might bring China around. It allows Beijing to claim it is not caving to Washington — and pitch policy changes as a much-needed effort to spend more money, where it belongs, at home.
International Herald Tribune