Looming trade war

October 13, 2005

Federal Reserve Chairman Alan Greenspan will be joining Treasury Secretary John W. Snow in Beijing next week, and the two lame ducks - the Fed chief's term is up next year and Mr. Snow is rumored on the way out next month - will try to head off a looming, potentially devastating trade war between the twin engines of world growth, the United States and China.

China's failure to substantially revalue its currency against the dollar - an upward move of at least 25 percent is needed - prompts a Washington threat to formally label Beijing as a "currency manipulator." That, in turn, could resurrect a congressional move to impose a 27.5 percent tariff on all Chinese goods - which would be such a blow to U.S.-China economic relations that it could well lead to a global recession.

U.S. protectionists have a point. China's artificial depression of its currency is a big contributor to its growing trade surplus with America, likely to top $200 billion this year, and to the soaring U.S. current-account deficit, likely to hit $800 billion this year. But a big share of America's red ink also comes from the free-spending policies of the Bush administration and Congress, not the suppressed value of the Chinese yuan.

So the task of Mr. Greenspan and Mr. Snow is at best delicate, if not impossible. Beijing's currency policies certainly are enabling it to eat America's lunch, but Washington's economic policies aren't sustainable - for which the two U.S. officials can take a good deal of blame. And if America could ever dictate to China - which is highly arguable - then it certainly isn't true now when Beijing's voluntary purchases of U.S. Treasury bonds have been keeping both U.S. government and consumer spending afloat. Sudden revaluation by Beijing accompanied by a rapid flight of its reserves from the dollar would mean quickly rising U.S. interest rates and a hard landing for many Americans.

What's needed is something akin to the 1985 Plaza Accord, in which the United States, Japan, West Germany, Britain and France - under circumstances similar to today's - agreed to orderly devaluations cutting the dollar's value by 50 percent over a year. But that involved global partners far more trusting of U.S. aims than China. So, if the Greenspan-Snow team just manages to craft enough of a compromise in Beijing to head off a trade war this fall, that would be quite a coup - and a legacy for both men.

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