China Pushes US Back Onto It Heels

China has already begun to harass the US ahead of the upcoming G20 conference. And, it has a reasonable amount of ammunition. The People’s Republic has rejected American suggestions to set current account targets which would put China at an economic disadvantage. The Federal Reserve, which has begun the QE2 process, faces criticism that the action gives the US advantages in currency valuations.

Cui Tiankai, a deputy foreign minister from China said “We believe a discussion about a current account target misses the whole point,” according to the FT. China received some support from Germany. The United States’s plans to pump more money into the economy will not solve the country’s problems, said Germany’s Finance Minister Wolfgang Schaeuble. “With all due respect, U.S. policy is clueless” he said

The current account issue is part of the US plan to blunt China’s trade and currency advantages, and, the American position should have some support among other G20 nations, particularly the developed ones that still suffer from slow or no GDP growth.

The US, represented by Treasury Secretary Tim Geithner, might as well tell the truth. The Federal Reserve’s  move to buy $600 billion in fixed income paper may have roiled the currency markets, but the action may be critical to a US recovery.

That is the dilemma which faces both the US and its adversary China. The People’s Republic can win the currency and trade war issues. The US economic recovery may stall if they do. The US needs to increase its export volume to restart GDP growth. China and other developing nations must decide whether they want valuation problems with their currencies or an ongoing recession where consumer spending will remain sluggish. Nations that export to America may find their economic prospects will be undermined if U.S. demand remains weak. That, in turn, could damage GDP growth in nations like China and Brazil.

The developing nations among the G20 should be careful. They may get what they want in their struggle with the US, and find that it is a Pyrrhic victory.

Douglas A. McIntyre