Thomas Palley says China's currency policy must change:
Death by Renminbi, by Thomas I. Palley, Commentary, Project Syndicate: Over the last several weeks, the dollar's depreciation against the euro and yen has grabbed global attention. In a normal world, the dollar's weakening would be welcome, as it would help the United States come to grips with its unsustainable trade deficit.
But, in a world where China links its currency to the dollar at an undervalued parity, the dollar's depreciation risks major global economic damage that will further complicate recovery from the current worldwide recession.
A realignment of the dollar is long overdue. Its overvaluation began with the Mexican peso crisis of 1994, and was officially enshrined by the "strong dollar" policy... That policy produced short-term consumption gains for America,... but it has inflicted major long-term damage ... and contributed to the current crisis.
The overvalued dollar caused the U.S. economy to hemorrhage spending on imports, jobs via off-shoring, and investment to countries with undervalued currencies.
In today's era of globalization, marked by flexible and mobile production networks, exchange rates affect more than exports and imports. They also affect the location of production and investment.
China has been a major beneficiary of America's strong-dollar policy, to which it wedded its own "weak renminbi" policy. As a result, China's trade surplus with the U.S. rose... The undervalued renminbi has also made China a major recipient of foreign direct investment, even leading the world in 2002 ― a staggering achievement for a developing country.
The scale of recent U.S. trade deficits was always unsustainable...
But China retains its undervalued exchange rate policy... When combined with China's rapid growth in manufacturing capacity, this pattern promises to create a new round of global imbalances.
China's policy creates adversarial currency competition with the rest of the world. ... Furthermore, the problem is not only America's. China's currency policy gives it a competitive advantage relative to other countries, allowing it to displace their exports to the U.S. ... Yet a mix of political factors has led to stunning refusal by policymakers to confront China.
On the U.S. side, a lingering Cold War mentality, combined with the presumption of U.S. economic superiority, has meant that economic issues are still deemed subservient to geo-political concerns. That explains the neglect of U.S.-China economic relations, a neglect that is now dangerous to the U.S., given its weakened economic condition.
With regard to the rest of the world, many find it easy to blame the U.S., often owing to resentment at its perceived arrogance. Moreover, there is an old mentality among Southern countries that they can do no wrong in their relationships with the North...
Finally, all countries likely have been shortsighted, imagining that silence will gain them commercial favors from China. But that silence merely allows China to exploit the community of nations.
The world economy has paid dearly for complicity with and silence about the economic policies of the last 15 years... It will pay still more if policymakers remain passive about China's destructive currency policy.
Our problems are not China's fault.