If there is one thing the world seems to have in abundant supply, it is institutions to coordinate the global economy. This is, in part, because old ones never die; they just set their meetings to occur on the sidelines of the shiny new institutions' gatherings. Somewhere in the alphabet soup of institutional acronyms -- WTO, G-7, G-20, IMF -- it would seem there might be one that could prompt China to revalue its currency. Certainly, Washington's had little luck on its own.
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The challenge is a stiff one. But international economic coordination can sometimes work nicely in resolving such issues. It can help countries escape from an economic prisoner's dilemma -- with each withdrawing tariffs, for example, for mutual gain. The institutions can allow countries to share experiences about which policies have worked and which have fallen short. Or the gatherings of leaders can imbue participants with a sense of accountability for the global repercussions of their domestic actions.
China's undervalued currency fits awkwardly into the prisoner's dilemma framework. There is a strong case to be made that China has been the chief victim of its renminbi policy. It is left with trillions of dollars' worth of foreign exchange reserves on which it looks increasingly likely to take significant losses. The domestic economic adjustment challenges that looked too daunting for China to tackle a few years ago appear even more daunting now. Adding to the concerns, the undervalued renminbi has contributed to a lack of monetary control that has sparked inflation within China.
All these reasons should drive unilateral action on China's part. But any such action has been slowed by domestic political concerns within China. Could an international bargain help overcome those? It's possible. The setting bears some resemblance to trade liberalization, in which countries may be able to forswear counterproductive policies -- such as voluntary export restraints -- while proclaiming political victory because others joined the bargain: "Yes, we have agreed to stop shooting ourselves in the foot, but everyone else will be forced to stop as well!"
This sort of deal was on offer from U.S. Treasury Secretary Timothy Geithner in G-20 talks a year ago. Countries holding major trade surpluses and deficits would have agreed to get their houses in order. China would have had to make politically painful adjustments, but could have claimed that it had won promises of U.S. fiscal rectitude as part of the bargain. In the end, neither China nor Germany seemed to find this offer of foreign pressure politically useful, and the effort got bogged down in a tedious set of negotiations aimed at defining the problem.
There was a time when it seemed plausible that international sharing of economic knowledge and experience could help sway Chinese currency policy. That now seems like another casualty of the global financial crisis, an episode that Chinese leaders seem to believe they won and the West lost. Whether or not the financial crisis renders subsequent Western analysis suspect, Chinese hubris means the advice is unlikely to meet a receptive audience.
But maybe China, as an emerging power, feels obliged to do its share to set the global system aright? This was the thrust of the "responsible stakeholder" policy espoused by World Bank President Robert Zoellick when he served as U.S. deputy secretary of state. No sign of this yet. China remains reluctant to take on either the rights or responsibilities that go with such a leading role. Incongruously, China's leaders seem to want to treat the country's large external imbalances as a purely domestic problem and just be left alone.
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