Barracking Obama begins
New US President faces confrontations with China and WTO
PRESIDENT BARACK OBAMA is already well involved in his first two major international confrontations. Those are respectively with China and with the World Trade Organisation. Both clashes were effectively inevitable. They relate primarily to the strongly protectionist views that have increasingly overtaken the Democratic Party in the United States.
However, history may well decide Obama’s biggest early policy failing was taken when he was still president-elect, before he had taken over from George W Bush. That relates to the decision – bitterly but ultimately forlornly opposed by most Republicans – to provide massive bail-out assistance to the motor industry in the US.
I noted (27 November 2008): “The incoming Obama administration could quickly find itself caught up in a big battle with the WTO.” So it has proved.
Grainne Gilmore, economics correspondent of The Times of London, reported on 28 January: “The head of the WTO – Pascal Lamy – warned the package of bailout measures designed to help developed countries through the economic downturn could harm developing nations.” He reported that “protectionism as a go-it-alone solution doesn’t work”.
Lamy said there had been no dramatic signs of resurgent protectionism yet – a scary reminder it was just such actions that so severely aggravated the post-1929 Great Depression. But he added there had been “small waves” as governments tried to boost economic activity through national bail-out programmes.
Lamy reported: “Bail-outs run the risk of putting developing countries at a disadvantage. There are planes that won’t fly, ships that won’t sail, cars that won’t be sold. Look at this from the side of the developing countries that by definition can’t afford big bail-out packages. Let’s not make the system more development-averse.”
Obama’s huge state support for the US automotive industry has triggered vehicleaid packages in Germany, France, Britain, Sweden, South Korea and China, among others.
Angel Gurria, secretary-general of the Organisation for Economic Cooperation and Development (OECD) pleads: “Governments must not be lured into riding to the rescue of every national firm or interest. We’ll only make the crisis worse if we succumb to the lure of protectionism and petty nationalism.”
Well, that’s as may be. But once Obama let the genie out of the auto box he created a possibly insuperable problem.
Then we move to Obama’s other major economic fight. That’s with China, technically over its alleged policy of “manipulating” the exchange rate of its currency, the yuan, to keep it artificially cheap. I have no doubt China does indeed pursue such a policy. It’s in line with a long-term, general Asian view that rapid economic growth must be underpinned by a critical export-led factor. That has its origins in the extraordinary success that Japan enjoyed from the mid-Fifties to the late Eighties.
The opening shots in the threatened head-on confrontation between the US and China were fired by new Treasury Secretary Tim Geithner in some written responses to the Senate “confirmation hearings” of his appointment.
The Economist (24 January) noted: “Geithner promised that the Obama team would push ‘aggressively’ for Beijing to change its policies. The sharp tone and use of the legally loaded term ‘currency manipulation’ ricocheted through financial markets as investors shuddered at the prospect of a Sino-American spat in the middle of a global slump.”
I certainly don’t dispute China has indeed long been a serial offender so far as artificially holding down the foreign exchange value of the yuan for colossal export-promotion purposes. That’s why I’ve always thought claims that the US should be “grateful” to China for supporting its dollar are ludicrous.
China wasn’t looking to do the US any favours – any more than Japan and West Germany were decades back when they, in particular, persistently aimed for an undervalued currency to promote their exports and never mind anyone else.
The Republicans under Bush understood that. But they were anxious to avoid exacerbating global economic tensions – yes, received wisdom is that Bush was unilateralist while Obama is multilateralist – while the New Democrat order appears far more confrontational, about economic issues at least.
The Economist urges: “The basic economic analysis of the Obama team – that a stronger yuan, on a trade-weighted basis, is necessary to rebalance China’s economy away from exports – is surely right.” However, the publication adds, crucially: “The world’s immediate problem is a dramatic shortfall in demand across the globe. That will not be righted by exchange-rate shifts.
“Over the short term the outlook for the world economy depends on whether governments’ stimulus packages are successful. Right now, team Obama would do better to focus on the scale, nature and speed of Beijing’s stimulus measures rather than rant about the currency.”
Obama hopes greatly to improve US-Iran relations. Fine. But he must also avoid greatly worsening links between the world’s two most important economies – the US and China.