Martin Wolf is concerned that China and Germany, with their huge trade surpluses, are endangering the entire global economy. The two countries are very different, but both “believe that their customers should keep buying, but stop irresponsible borrowing”. This is impossible, since countries with trade deficits must finance them by borrowing (or from income earned on capital account). German and Chinese policymakers seem not to understand this elementary truth.
Here is Martin Wolf on China:
Speaking at the end of the National People’s Congress, Mr Wen [Jiabao, China’s premier] declared: “What I don’t understand is depreciating one’s own currency, and attempting to pressure others to appreciate, for the purpose of increasing exports. In my view, that is protectionism.” He also insisted he was worried about the safety of China’s dollar investments.
What, I wonder, does Premier Wen mean by this, apart from telling the US to leave China’s exchange rate policies alone? If the US desire for a weaker dollar is “protectionist”, how much more so is China’s determination to keep its currency down, come what may? There is nothing evidently “protectionist” about asking a country with a huge current account surplus to reduce it, at a time of weak global demand. If I understand China’s declared position correctly, it wants the US to deflate itself into competitiveness, instead, via fiscal and monetary contraction and, presumably, falling domestic prices. That would be dreadful for the US. But it would be dreadful for China and the rest of the world, too. It is also not going to happen. China surely knows that.
Martin Wolf, “China and Germany unite to impose global deflation”, Financial Times, 17 March 2010.
The German position is much the same, except that Germany targets eurozone partners rather than the US.
Tags: China, exchange rates
