Obama's Sudan Fumble

How the U.S. president is bungling Sudan's elections -- and it will come back to haunt him later.

Sudan is voting in its first national elections in over 20 years, and the process is playing out much as one might expect, given that the country's ruling National Congress Party is led by accused war criminal President Omar Hassan al-Bashir. Much of the international reporting so far has focused on the numerous irregularities and technical glitches that have become apparent as voting unfolds, almost all of which (surprise!) seem to favor the ruling party. But this is an election that was effectively stolen long ago, as the Sudanese government steadfastly refused to implement the provisions of the 2005 Comprehensive Peace Agreement that were supposed to create a free and fair environment for elections. Instead, press freedoms remain badly curtailed; the dreaded national security service still detains opposition figures at will; freedom to publicly assemble is denied; and everything from voter registration to the printing of ballots has been skewed to assist Bashir in his desire to stage-manage an election without actually risking a fair vote.

For veteran Sudan watchers, none of this comes as much of a shock. Analysts looking for democratic upsides have had to console themselves with the few examples in which opposition groups have gained a toehold of political space to publicly question the regime. What is more surprising, however, has been the muddled and squeamish posture of U.S. President Barack Obama's administration toward Sudan's election -- one that underscores a larger, ongoing struggle to place democracy promotion effectively within the context of U.S. foreign policy more broadly.

Obama's special envoy for Sudan, retired Maj. Gen. J. Scott Gration, no stranger to gaffes, triggered his most recent bout of eye-rolling in both Sudan and Washington when he emerged from a meeting with the National Election Commission 11 days ago and declared that the commission's members had given him "confidence that the elections will start on time and they would be as free and as fair as possible." The comments were unfortunate enough by themselves, but their timing also conspired against them; Gration spoke just as increasing numbers of opposition parties and candidates were either boycotting the election completely or pulling out of the presidential contest -- as did the largest party in South Sudan -- because the election was transparently neither free nor fair.

Why the rose-colored glasses from the special envoy? Gration is clearly eager to view this election as a necessary benchmark, a box to check, on the road to the broader issue of independence for South Sudan, which will be determined in a January 2011 referendum. Any suggestion that Sudan's election was flawed could provoke Bashir to try to disrupt the January referendum, Gration fears, and indeed, Bashir has made threats to this effect. Still, the imperatives of his short-term diplomacy seemed to be at odds with the long-term goal of transforming Sudan into a freer and more democratic place.

Here is where we see some interesting parallels with two other recent elections, both initially mishandled by the administration: those in Afghanistan and Iran. In all three cases, the administration seemed reluctant to acknowledge upfront that the elections were profoundly flawed, even though it had more than enough evidence to that effect. In all three cases, the administration moved only slowly to toe a tougher line -- after widespread howls from human rights activists, opposition parties in the respective countries, the media, and Republican critics were heard first.

Obama was wise to move away from the bellicose democracy-promotion of George W. Bush, and the president used his June 4 Cairo speech to make the case to the Islamic world that he would take a more respectful, nuanced approach to that region than did his predecessor. That is all well and good. But trying to reset the tone and engage in effective dialogue just won't work if it also entails obvious denials of reality. Pretending that Afghan President Hamid Karzai and his allies did not engage in widespread fraud did nothing for U.S. credibility or Washington's strategic partnership with Kabul. It shouldn't have taken days after the Iranian presidential vote for Obama to acknowledge that every vote deserved to be counted and that basic freedoms needed to be respected -- yes, even if his administration was having a high-wire dialogue with Iran on the future of nuclear weapons. Now again in Sudan, the special envoy shouldn't bless a tragically flawed election with the copacetic stamp of "free and fair enough" -- even as we ponder the likelihood that the country will split in two next January.

There's no need to sacrifice U.S. policy goals to lofty truth-telling. In fact, there's a case to be made that diplomatic goals are actually better achieved with frank honesty when elections don't pass the smell test. For example, if the administration had taken a tougher line with Khartoum about creating the underlying conditions for a free and fair national election, the country would already be further down the road toward creating genuine power-sharing in Sudan. Such an arrangement would in turn incentivize Bashir not to engage in adventurism around the upcoming independence referendum, and it would be an important step toward preventing future conflicts in Northern Sudan -- after the South heads for the exit. Would negotiating all this be difficult? Absolutely. Yet, grasping the nettle now seems far preferable to watching from the sidelines as Sudan descends into broader conflict -- again.

So if shouting about democracy from the rooftops à la George W. Bush was not effective, neither will be defending democracy in mumbled tones. One hopes that this administration has learned from its initial stumbles. Obama will have an important opportunity to get it right when he offers his first public comments on Sudan's election in the days to come.



Beijing Is Key to Creating More U.S. Jobs

How China's unfair currency policies are exporting unemployment all over the world -- and why baby steps won't solve the problem.

China has apparently decided to let its currency start rising again. There are two objectives. Domestically, a stronger renminbi will help counter inflationary pressure and dampen the excessive growth that is fueling it. Internationally, appreciation will start curbing China's huge current account surplus and thus counter the pressures that are building in the United States and elsewhere to retaliate against China's massive currency undervaluation by installing new barriers against its exports. The overriding issue is whether China will move quickly enough and substantially enough to achieve these goals.

The renminbi is now undervalued by about 25 percent on a trade-weighted basis and by about 40 percent against the U.S. dollar. Every day, China buys about $1 billion in the currency markets, holding down the price of the renminbi and thus maintaining China's artificially strong competitive position. Several of China's neighbors -- including Hong Kong, Malaysia, Singapore, and Taiwan -- similarly intervene to remain competitive with China and thus substantially undervalue their currencies against the dollar and other currencies.

Such currency manipulation is a blatant form of protectionism. It subsidizes all Chinese exports 25 to 40 percent. It places the equivalent of a 25 to 40 percent tariff on all Chinese imports, sharply discouraging purchases from other countries. It would thus be incorrect to characterize a policy response by the United States and other countries as "protectionist" -- such actions should in fact be viewed as anti-protectionist.


Largely as a result of this competitive undervaluation, China's global current account surplus soared to almost $400 billion and exceeded 11 percent of its GDP in 2007, an unprecedented imbalance for a major trading country. This surplus declined sharply during the Great Recession as global demand weakened, but it remained above 5 percent of China's GDP even in 2009. The International Monetary Fund (IMF) estimates that the surplus is rising again and will hit record levels and exceed the U.S. global deficit by 2014. In a world where subpar growth and high rates of joblessness are likely to remain for some time, China is exporting large doses of unemployment to the rest of the world -- not just to the United States but also to Europe, Latin America, India, Mexico, and South Africa.

If China eliminated its currency misalignment and thus cut its global surplus to 3 to 4 percent of its GDP, that would reduce the U.S. global current account deficit $100 billion to $150 billion. Every $1 billion of exports supports about 6,000 to 8,000 (mainly high-paying manufacturing) jobs in the United States. Hence, such a trade correction would generate an additional 600,000 to 1.2 million jobs. Correcting the Asian currency alignment is by far the most important component of U.S. President Barack Obama's new National Export Initiative. Its budget cost is zero, which also makes it by far the most cost-effective possible step to reduce the unemployment rate and help speed economic recovery.

Such exchange-rate realignment is not without precedent. In 2005, Beijing announced a new "market-oriented" exchange-rate policy and let its currency appreciate 20 to 25 percent. In mid-2008, however, China repegged to the dollar, and the renminbi has ridden it down, taking back about half the previous rise. China has doubled the scale of its currency intervention since 2005, now spending $30 billion to $40 billion a month to prevent the renminbi from rising; on this metric, its currency policy is about one-half as "market-oriented" as when it announced such a strategy five years ago.

This intervention violates all relevant international norms. The IMF commits member countries, including China, to "avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members." Moreover, the IMF's bylaws call for "discussion" with any countries that practice "protracted large-scale intervention in one direction in exchange markets" -- a succinct description of China's currency policy over the past seven years. Similarly, the General Agreement on Tariffs and Trade (GATT), which is now an integral part of the World Trade Organization (WTO), indicates that "contracting parties shall not, by exchange action, frustrate the intent of the provisions of this Agreement."

Huge current account imbalances, including the U.S. deficit and the Chinese surplus, of course reflect a number of economic factors. Successful international adjustment requires corrective action by the United States and other countries, as well as by China. Effective adjustment policies must include much more than currency changes, notably including dramatic fiscal correction by the United States. But it is impossible for deficit countries to reduce their imbalances unless surplus countries reduce theirs simultaneously, and the restoration of equilibrium exchange rates is an essential element of an effective global "rebalancing strategy" as sought by the G-20 over the past year.

This is an excellent time for China to begin restoring an equilibrium exchange rate for the renminbi. The Chinese economy is booming (and China deserves great credit for leading the world recovery from the Great Recession). But inflation is rising and new bubbles are threatening, and the Chinese authorities have started to take measures to avoid overheating, including by shaving the growth rate. Currency appreciation would help by lowering the price of imports and dampening demand for exports. This would also promote a major structural policy goal, helping to rebalance the country's economic growth away from exports and toward domestic demand.

The case for a substantial increase in the renminbi's value is thus clear and overwhelming. Furthermore, it now appears that China is preparing to renew its gradual (5 to 7 percent per year) 2005-2008 appreciations and/or announce a modest one-shot revaluation, with or without subsequent gradual appreciation. The most sensible approach for China would be an immediate rise of 8 to 10 percent with an indication that it would not move again until 2011, which would deter the accelerated capital inflows that could result from the one-way bet of a renewed upward crawl and indeed probably trigger a reflow that would ease the conduct of monetary policy.

It is not yet clear, however, whether China will move with sufficient speed and in sufficient magnitudes, over a period of three or four years, to eliminate its undervaluation and resolve the underlying problem. Hence the United States and other countries, while welcoming any meaningful new Chinese actions, must continue the "carrots and sticks" effort to both persuade China to revalue adequately and prepare retaliatory actions if it does not. It is of course particularly important that any stepped-up initiatives toward China be multilateral. The Chinese are much more likely to respond positively to a multilateral coalition than bilateral pressure from the United States, especially if that coalition includes a number of emerging market and developing economies whose causes the Chinese frequently claim to champion.

Much of the blame for the failure of U.S. policy in this area falls on Washington itself because it has been unwilling to face facts and label China a currency manipulator under the plain language of the Trade Act of 1988. This has substantially undermined U.S. credibility in seeking multilateral action against China in the IMF, the WTO, the G-20, or anywhere else. If China continues to intervene heavily in the currency markets and manages the renewed rise in a very restrictive manner, say by less than 8 to 10 percent per year, a sensible and effective strategy must begin by reversing that feckless position with deeds rather than just words. In that situation, the Obama administration could adopt a three-part strategy to promote faster and more substantial appreciation of the renminbi's exchange rate.

First, the Treasury Department should brand China a "currency manipulator" in its next foreign exchange report to Congress -- the report now delayed from April 15, or in October of this year at the latest -- and, as required by law, then enter into negotiations with China on the currency problem.

Second -- with the support of Europe and as many emerging market and developing economies as possible -- the United States should seek a decision by the IMF to launch a "special" or "ad hoc" consultation to pursue Chinese agreement to remedy the currency situation. If such a consultation fails to produce results, the United States should ask the IMF Executive Board to publish a report criticizing China's exchange-rate policy.

Third, with a broad coalition, the United States should exercise its right to ask the WTO to constitute a dispute settlement panel to determine whether China has violated its obligations to that institution and to recommend remedial action. The WTO under its rules would ask the IMF whether the renminbi was undervalued, another reason why it is essential to engage the IMF from the outset.

This three-pronged initiative would focus global attention on the continuing misalignment and China's unwillingness to initiate adequate corrective action. The effort would have maximum impact if the United States undertook it with countries constituting a substantial share of the world economy, including emerging market and developing economies as well as the Europeans and other high-income countries. Asian countries, such as Japan and India, will be skittish in confronting China in this way, but they are hit hard by the Chinese undervaluation and should be increasingly willing to join the coalition as its size grows.

The objective of the exercise is of course to persuade, or "name and shame," China into corrective action. Unfortunately, the IMF has no sanctions that it can use against recalcitrant countries. Hence the WTO -- which can implement sanctions -- needs to be brought into the picture. Unfortunately, there are technical and legal problems with the WTO rules too (like the IMF rules), so they might also need to be amended for these purposes in the future.

The United States could of course intensify its initiative by also taking unilateral trade actions against China. For example, the administration could decide that the renminbi's undervaluation constitutes an export subsidy that would be considered in decisions to apply countervailing duties against imports from China. Congress could amend current laws to make clear that such a maneuver is legal. In either case, China could appeal to the WTO, and the United States would have to defend its actions under the Subsidy Code.

But product- or sector-specific steps, such as last year's tire tariff, are undesirable because they distort and disguise the across-the-board nature of the Chinese currency misalignment. China's competitive undervaluation represents a subsidy to all exports and a tariff on all imports -- not just a few. It requires a comprehensive response via the exchange rate itself. A U.S.-led global effort offers the best chance to convince China to let its currency rise sufficiently and to help both itself and other countries achieve sustained economic recovery.