The U.S. goes all in on the G-20

Treasury Secretary Timothy Geithner makes it pretty clear how he thinks the next few months will unfold with respect to China's exchange rate policy:

I  have decided to delay publication of the report to Congress on the international economic and exchange rate policies of our major trading partners due on April 15.  There are a series of very important high-level meetings over the next three months that will be critical to bringing about policies that will help create a stronger, more sustainable, and more balanced global economy.  Those meetings include a G-20 Finance Ministers and Central Bank Governors meeting in Washington later this month, the Strategic and Economic Dialogue (S&ED) with China in May, and the G-20 Finance Ministers and Leaders meetings in June. I believe these meetings are the best avenue for advancing U.S. interests at this time....

China's inflexible exchange rate has made it difficult for other emerging market economies to let their currencies appreciate.  A move by China to a more market-oriented exchange rate will make an essential contribution to global rebalancing. 

Our objective is to use the opportunity presented by the G-20 and S&ED meetings with China to make material progress in the coming months. 

In layman's terms, the Obama administration has decided that it will rely on multilateral pressure to get China to change its policy rather than take the unilateral route -- for now.  In blog terms, the administration rejected the Krugman/Bergsten/Schumer approach to pressuring China in return for... well... my preferred approach

Which automatically makes me nervous, of course, because I could easily be wrong.  Still, there have been signs that other members of the G-20 feel the same way as the United States.  And it's also true that the hour-long conversation between President Obama and President Hu seems to smoothed over a lot of recent contretemps.  Indeed, Nicholas Lardy told the New York Times that on Iran and North Kotrea the U.S. was getting a fair amount in return for deferring the report. 

A few Chinese central bankers and think-tankers are now making noise about movements on exchange rates.  Making this shift via G-20 and bilateral channels -- rather than in response to a Treasury finding of currency manipulation or Congressional threats of protectionism -- gives China a more politically palatable justification for policy change.  Beijing will likely move in the right direction, albeit more slowly than anyone else would like. 

And, if nothing happens from these meetings, China can be named in the fall.  Indeed, the paradox of two-level games is that there needs to a rising but manageable possibility of protectionist action by the United States to give China an incentive to alter their policy. 

In many ways, this is put-up-or-shut-up time for the G-20.  If the U.S. has no option but to name China, it starkly demonstrates the limits of the G-20 process at forcing policy coordination.  If, on the other hand, China pursues a more accomodationist approach, then that augments the G-20's prestige as a useful forum. 


UPDATE:  Simon Lester has a round-up of reactions. 

Daniel W. Drezner

China and America, sitting in a tree?

Both the Guardian and the New York Times have stories today suggesting that the Sino-American relationship is on the mend.  Last night Barack Obama and Hu Jintao spoke on the phone for, like, a whole hour.  It was such a good chat that Air Force One sat on the tarmac at Andrew Air Force base for ten minutes so Obama could finish the call. 

There has been an appreciable shift in the past week.  Hu pledged to attend the Obama's nuclear proliferation summit a few weeks from now.  U.S. oficials sound confident that China is on board for another round of United Nations sanctions against Iran -- though the  negotiations for that could take a while.  It also appears that China has not followed through on sanctions against U.S. companies for arms sales to Taiwan.  On the American side, at a minimum, the Treasury Department has deferred submitting its report to Congress on Chinese currency manipulation practices for a little while.  The headline for this Vikas Bajaj story suggests that Hu's visit "may signal easing by China on currency," though there's no actual evidence in the story backing up that asserrtion. 

So, no new Cold War then?  The Financial Times' Gideon Rachman urges readers to ignore the ephemeral and pay attention to structural factors:

1) Economic tensions. Tim Geithner, the US Treasury Secretary, has just publicly expressed his concern about the very high levels of US unemployment and many American economists, including in the administration, blame America’s problems in large part on “Chinese mercantalism”. If the Chinese refuse to let the RMB appreciate, or even allow only a modest appreciation, then a clash will eventually happen.

2) Climate change: Remember Copenhagen? There is no sign that the two nations are going to move any closer on this most divisive issue.

3) Iran - A new pacakge of sanctions could head this one off. But they are unlikely to be strong enough to satisfy the US or - let us not forget - to achieve their objective.

4) The mega-trend in the background is the rise of China and the relative decline of the US - and the expression of this will be the gradual challenge to American military hegemony in the Pacific. This will not be a comfortable process.

So look beyond today’s headlines. I can assure you, the Chinese do.

Well..... let's think about this for a second.  The first three issues are all about more than the bilateral Sino-American relationship.  On the economic front, there's evidence that China has ticked off other countries beyond the United States.  On Iran, the U.S. was careful to line up support on sanctions from the Britain, France and Russia, leaving China as the sole P-5 holdout.  And on climate change, at a minimum, China came out of Copenhagen looking like something of a bully. 

My take of the past six months is that the Chinese overplayed their hand very badly across an array of issues, irking not just the United States but other significant countries.  In response, the U.S. has been able to exploit multilateral resentment as a way of teaching Beijing about the security dilemma putting subtle pressure on China to moderate its tone and actions.  As for the mega-trend, well, that's happening, but it's still quite a ways off. 

Rachman still makes some decent points.  There are fundamental conflicts of interest.  Going beyond the issues Rachman mentions, there's also minor stuff like the fact that China and America's domestic regimes look a wee bit different

For now, however, much of China's recent bluster turned out to be self-defeating.  What will be interesting to see is how both Washington and Beijing will learn from the recent spot of unpleasantness. 

UPDATE:  Hmm.... this Financial Times story by Jamil Anderlini and Alan Beattie is very interesting: 

Beijing may adjust its policy of pegging its currency to the dollar provided a visit this month by Chinese President Hu Jintao to Washington goes smoothly, according to a top adviser to China’s central bank.

Li Daokui, a professor at Tsinghua university and a member of China’s central bank monetary policy committee, said as long as the US respected China’s “core interests” the currency disagreement could be easily solved.

Barack Obama and his Chinese counterpart talked for an hour on Thursday evening, during which Mr Hu stressed that the “proper handling of Taiwan and Tibet” was the biggest factor in Sino-US ties, according to China’s state media.

“As long as this is understood, everything else will be easy to handle and we will find the key to unlock the exchange rate problem,” Mr Li told the Financial Times.