x Abu Dhabi, UAEFriday 28 July 2017

Currency debate reveals larger dangers

The trade in tough words between China and the United States is about their only balanced exchange.

The trade in tough words between China and the United States is about their only balanced exchange. Tensions between the world's two largest economies are rising and no more apparent than in a renewed spat over the value of China's currency, the yuan.

Giving in to US-led pressure to allow the yuan to rise in value more rapidly would "bring disaster to China and the world", the Chinese premier Wen Jiabao said last week. Mr Wen's words followed a vote in the US House of Representatives last month where majorities of both Republicans and Democrats voted in favour of tariffs on Chinese goods as a response to their "fundamentally undervalued currency".

The yuan does not float on international markets like the dollar, euro, or other major currencies. As the value of the yuan is kept lower relative to the currencies of China's competitors, China's exports have an advantage. The Americans are right: this perpetuates damaging imbalances in the global marketplace. But the value of the yuan did not cause them. A more rapid appreciation of the yuan will not resolve them.

Both China and America's economy have structural weaknesses. America has spent too much and saved too little. Like much of the West, the US has neglected its manufacturing sector. It has become too dependent on low-cost goods and labour from China and the rest of the developing world. For all of China's economic success, it too must reassess its model for growth. Its economy remains too export driven. Demand for its products in the West helped to fuel its rapid ascent. That template is unlikely to work as well in the wake of the financial crisis. The purchasing power of consumers in the West will not be enough to create jobs for the 20 million Chinese who enter the labour market each year. Clearly, China must do more to stimulate domestic demand.

Debate about the value of the yuan raises the possibility that China and the United States will engage in a trade war that the global economy can ill afford. But there is a longer-term danger to this debate. The tussle over the yuan is symptomatic of a failure of both powers to confront changes in the global economy. Whether in Communist China or in the American Republic, it is easier for leaders to blame outside parties than make painful but necessary adjustments at home. For the sake of both nations and for the global economy, they must work together.