by C. Fred Bergsten, Peterson Institute for International Economics
Op-ed from The Washington Post
September 10, 2003
© Washington Post
Treasury Secretary John Snow returned home apparently empty-handed from his publicized visit to Asia last week. China rejected any rise in the value of its currency against the dollar now, pledging only to let it float more freely at some undefined point in the distant future. Japan would not agree to let its currency move upward either, and in fact resumed intervention to weaken the yen as soon as the secretary left Tokyo.
The only feasible remedy for the huge U.S. trade deficit, now approaching $600 billion, is a substantial decline of the dollar. Such adjustment is especially required against the major Asian economies, which have piled up the world's largest surpluses in recent years. If the results of the past week are permitted to stand, the United States will lose additional high-paying manufacturing jobs. Pressures for trade protection will increase substantially.
So will the risk of financial crisis, leading to higher U.S. interest rates, when the dollar ultimately crashes due to the implausibility of continuing to attract $ 4 billion of foreign capital every working day to finance our external imbalances.
The big and largely unnoticed story, however, is that Snow was not really permitted to try. The administration wants China to keep North Korea from going nuclear. It wants Japanese troops in Iraq. Hence the secretary of the Treasury was blocked from the aggressive effort that would be necessary to correct our massive trade problem via further orderly adjustment of the exchange rates.
This was not the first time that short-term foreign policy concerns trumped U.S. economic interests within the administration. Snow had already been dutifully giving Japan a pass as a reward for its supposed support in the Middle East. Despite his frostiness toward "Old Europe," President Bush pandered to his continental hosts in June by declaring that the decline of the dollar against the euro "was contrary to U.S. policy." The dollar started rising immediately thereafter and has since given back about one-third of its previous move against the only major currency where it had achieved significant correction.
Never mind that France and Germany are still stiffing the administration on Iraq. Never mind that Japan shows no signs of sending troops to the Middle East. Never mind that China blames the United States for the impasse with North Korea. The key questions are whether it is correct to subordinate legitimate U.S. economic concerns to such foreign policy goals and whether it is even good foreign policy to do so.
Throughout the Cold War, it was charged that successive U.S. governments placed overriding importance on international politics and, when necessary, shored up friends and allies at the expense of U.S. firms and workers. The termination of that conflict for global supremacy was supposed to end such practices, especially with the globalization of the U.S. economy and hence the growing impact of trade and international finance on our own welfare. Yet the current administration, while claiming concern about the economy, and especially its workers, has restored the old priorities to an extreme degree.
Ignoring serious domestic economic concerns is not even good foreign policy. The most important reason is that burgeoning trade deficits, and especially an overvalued exchange rate for the dollar, trigger protectionist forces that poison U.S. relations with all of this country's major trading partners, which also happen to be its chief friends and allies.
The growing storm over China is the latest example. Congressional leaders from both sides of the aisle, the business community and labor agree that the administration must take forceful action to bring that country into the center of the international adjustment process. Remarkably, there is a strong consensus that this should happen via revaluation of China's exchange rate rather than new trade barriers. But Snow was precluded from pursuing the issue forcefully and was even instructed to ask the Chinese to "float their currency," when everyone knew they would rightly reject such an approach because it requires that they open themselves to the vagaries of global capital markets. The inevitable result of this impasse will be new assaults on China's exports to the United States, badly undermining a Chinese leadership that overcame enormous domestic resistance to join the World Trade Organization. Similar dynamics would play out with Europe and Japan.
The president and his foreign policy officials should recall that huge economic imbalances can be as destructive of relations among nations as traditional security disputes. Ignoring such problems until they reach crisis proportions will in fact inflame our domestic politics (especially in the run-up to a presidential election in which jobs and trade will be major issues) and force the administration to lash out against key countries later in ways that cause far greater conflict than seeking modest adjustments now. In the case of the current administration, any such campaign would deepen worldwide perceptions of bullying and unilateralism. It would also jeopardize laudable current foreign policy initiatives such as the Doha Round in the WTO and the Free Trade Area of the Americas.
It is time for the foreign policy team to let the economic team pursue legitimate U.S. goals through tough but legitimate means, pressing China to accept a substantial one-shot currency revaluation and directly countering Japan 's intervention to block dollar correction. If they will not do so on their own, the president must force a rebalancing of economic and foreign policy considerations to promote the overall national interest.