He also came out with the old one that a strong dollar is in US interests, which could be taken as a tacit admission that the latest experiment to solve trade imbalances with its own version of currency manipulation has failed. As I’ve written before, the US makes very little that other countries wish to buy, so surely its best policy is to make its imports cheaper?
Commerzbank analyst Lutz Karpowitz has come up with a more sensible appraisal of the dangers of accusing China of currency manipulation. “There are legal consequences when the Treasury is designating a country as a currency manipulator,” he writes. “In such a case, the [US] government is obliged to start talks with that country, aimed at eliminating that ‘unfair’ advantage. That’s the reason why the Bush administration – despite often being critical about China’s exchange rate policy – always stopped short of blaming China a currency manipulator. Negotiations under these circumstances would be very difficult. Obviously the new administration is planning to run a much tougher stance versus China and is not afraid of these difficulties.”
Karpowitz points out that the sabre rattling could hardly come at a worse moment for China. The country has been hit badly by the global recession and that has already brought about a fair degree of yuan appreciation. Karpowitz argues that China can hardly afford to see significantly lower USD/CNY rates, so the most likely outcome is some kind of accord.
US protectionism, if imposed, will almost certainly have disastrous results. “The talk at Davos is dominated by achieving global solutions,” says Paul Day, deputy head of research at Mig Investments. “Protectionism, rife during the great depression, is the antithesis of such solutions. It invariably leads to an equal and opposite reaction, and the danger is that if the US goes down this path, it will tip the global economy from a recession into a depression,” he warns.
