Tuesday, February 7, 2012
US–China trade friction and India’s role in the G20
As developed countries struggle to recover after the global recession and try to confront the looming sovereign debt crisis in Europe, big emerging markets are now driving global growth.
Given the slow down in developed countries, emerging economies are trying to boost domestic demand to sustain growth — and this is particularly the case in China. But in recent months these developing economies have started to feel the pressure from the slowdown in the West, leading the G20 to put global growth high on its agenda.
Emerging economies have managed to keep up their growth rates and exports, and have thus experienced a trade surplus, while developed countries are facing huge trade deficits and have come to favour protectionism. The importance of recovering growth and jobs in the US, for example, and efforts to sustain export-led growth in China are now creating trade and currency friction between these two countries. For several decades there has also been a consistent increase in the trade deficit between the two — in favour of China — and this imbalance reached over US$200 billion per annum in 2010. The US kept quiet over this for a long time, as the trade deficit helped contain inflation due to cheap imports from China, and the unemployment level was still manageable. But as soon as the US realised this trade friction with China was affecting employment and there was no level playing field for its domestic industries, the Americans resorted to protectionism.
A major allegation against China is that its exchange rate is fixed and is not allowed to appreciate — all in the name of stability. As a result, China’s currency is undervalued, making its exports particularly competitive in the international market. The US has adopted several measures to counter the growth of Chinese exports and boost its own domestic economy. First, it has upped the number of anti-dumping cases against China. And second, the US government passed legislation to punish Chinese exports, as it believes that China is heavily subsidising its export items to the US. There have also been instances of tariff hikes on several import items from China.
The currency friction between China and other developed and developing economies is a matter of concern for the G20. China and the US are not only the world’s biggest economies, but they are highly dependent on each other for their growth — and of course the rest of the world also depends on them. China has nearly US$1.5 trillion worth of dollar-denominated assets, and it will be problematic for the US if China stops buying US government bonds. The US is equally dependent on China for its exports of primary commodities such as meat and fruit, and many US companies are based in China in the hope that domestic demand will rise and they will make profits. But Chinese domestic demand is still largely suppressed, meaning the US is not able to obtain sufficient market access. Meanwhile, China depends largely on the US market to sell its labour-intensive manufactured items. Nearly five per cent of China’s GDP comes from exports to the US. So, the trade friction continues.
The world’s two largest economies must work together toward solving this trade friction and to help avoid a currency war. China must allow its currency to be market determined, while the US must do away with its harsh protectionist measures.
India is an active member of the G20 and works alongside China and other developing countries on major international issues, including the restructuring of global financial architecture, and achieving progress on climate change and the Millennium Development Goals. India is aware the trade and currency friction between the US and China will not only hurt the G20’s agenda and the world economy, but will also affect its own future growth prospects. The US and China are India’s major trading partners, and any slowdown in these two countries would affect India as well. So Delhi has been opposing any protectionist measures adopted by developed countries, and pushing for market reforms by phasing out wasteful and distorting subsidies in countries like China.
India also understands the impact of China’s undervalued currency on its exports and expects China to understand the fair principles of trade. India believes there are bigger and more pressing problems that need the attention of the G20. Its member countries need to focus on solving the European debt crisis, help countries resolve trade and currency friction and give fresh impetus to the Doha Round. Against this backdrop, India needs to play a proactive role in the G20 to make it an effective body for dealing with these issues.
By Dr Geethanjali Nataraj Fellow at the National Council of Applied Economic Research, India.East Asia Forum