Article: And now, currency wars
By Marc Erikson
atimes.com
Complementing its strategic-military doctrine of preemptive action against putative constructors and proliferators of weapons of mass destruction, the administration of US President George W Bush has turned to preemption in the financial sphere to challenge unpalatable currency regimes and counteract their alleged ill effects on the US economy. China, Japan, and other Asian nations are the targeted offenders ... and, for a change of pace, victory in the war unleashed at the Group of Seven (G7) Dubai meetings is to be achieved not through overwhelming US strength, but through deliberately induced US (dollar) weakness.
The ultimate goal is the same: defense of the US homeland - first against terrorists and their would-be suppliers, now also against foreign traders and thieves of US jobs armed with the weapons of "unfairly undervalued" currencies. But the Washington cast of characters pitted against Asian central bankers and finance ministers is a strange one. You'd expect John Snow, the treasury secretary, and he has, indeed, taken the point. With his early-September Tokyo-Beijing-Phuket (Asia-Pacific Economic Cooperation finance ministers' meeting) junket, he set the stage for the Dubai declaration on "flexible exchange rates". But Texas oilman Don Evans, the commerce secretary, Sam Bodman, his deputy, formally in charge of the National Oceanic and Atmospheric Administration and the National Institute of Standards and Technology?
To figure that one out, you have to go back to September 1, Labor Day in the United States. On that occasion, Bush, accompanied by his chief political strategist Karl Rove, stood in the driving rain at an operating engineers training center in Richfield, Ohio, and told assembled trade unionists, "We've lost thousands of jobs in manufacturing, some of it because of productivity gains - but some of it because production moved overseas ... One way to make sure that the manufacturing sector does well is to send a message overseas, [to] say, look, we expect there to be a level playing field when it comes to trade."
Bush was there and said what he said because Rove, who must get Bush re-elected, had told him so. Some 2.5 million US manufacturing jobs have been lost since early 2001 ... to China, say the trade unions, the National Association of Manufacturers (NAM) and the US Chambers of Commerce, and they - and, of course, the Democrats running for president - are blaming Bush. It's nonsense. The United States has been losing manufacturing jobs for decades. Ten percent of the workforce is now employed in manufacturing; in another 10 years, according to Organization of Economic Cooperation and Development (OECD) estimates, it will be 2-3 percent. It's a structural shift in the US economy that will not be reversed. But it does loom as a major election issue and someone has to be blamed. So, the NAM, Rove and the Department of Commerce decided that it might as well be China, which now runs an annual trade surplus of more than $100 billion with the US.
The next step in that logic is to blame the "undervalued Chinese yuan", which is pegged to the US dollar. Never mind that China has major competitive advantages, from cheap labor to new production technologies, in large part installed there by US companies producing for export to the US. Not a single US job would return to Ohio or Tennessee were the yuan revalued or floated as the NAM, the Commerce Department and a bunch of senators demand and as John Snow demanded when - also on Labor Day - he spoke in Tokyo and later in Beijing and Phuket. Jobs lost by China as the result of a higher yuan would go to Vietnam or Indonesia.
Karl Rove is a nasty piece of work, a college dropout from Utah who learned his metier from the likes of Donald Segretti, a onetime Richard Nixon dirty-tricks specialist. But he is one of George W's closest buddies and has been with the Bush family ever since he advised the older Bush in his election campaigns, then young George in his campaigns for governor of Texas and, of course, in the 2000 presidential race. About international finance, Rove knows little; but China will have looked like an easy target and, by attacking the yuan peg, at least the Bush administration would look as if it was doing something in the international arena to protect and regain US jobs.
Evans and Bodman don't have much better credentials when it comes to global finance, but their department is in charge of trade, and so they got into the act. Bodman, when asked on September 24 whether the preceding weekend's G7 statement was directed at both China and Japan, replied, "The answer is yes." By that time, the dollar had already dropped by 5 yen against the Japanese currency, the Nikkei 225 stock average was down 6 percent on worries that a higher yen would hit exporters, and the European and US equity markets were down as well on concern that a weak-dollar policy had been adopted by the US and could abort global economic recovery. And John Snow, the railroad man? He got a bit scared that he had unleashed something he couldn't control and - unconvincingly - reiterated the US strong-dollar policy. But the damage had been done. Only China didn't budge. The People's Daily in a front-page editorial had written on September 2 when Snow arrived in Beijing that China's currency policy would not be determined by US electoral policy, and it has stuck with that line.
Japan belatedly has also reaffirmed that it will prevent further rapid yen appreciation through currency-market interventions as necessary, and several such interventions were carried out last week. On that, global financial markets have calmed and equity markets have rallied. But the dangers inherent in the Rove initiative aren't over, and Don Evans goes to Beijing this month to keep on pushing for a "level playing field". China will likely be told that it has the choice between punitive tariffs imposed on its exports to the US or currency regime change. Continuing outright Chinese resistance won't be easy. The yen is already much higher and, along with it, most other Asian currencies have risen against the dollar, as the yen is a significant component in the basket of currencies that determines their valuation. They all now have to worry about losing export competitiveness to China and become de facto US allies in this game.
How will this play out? Iraq's alleged weapons of mass destruction led to all-out war. Asia's alleged currency weapons of US job destruction, with any luck, will not. While in a currency war the Bush administration would enjoy the support of the Democrats, it has already run into a wall of opposition on Wall Street. Former Bill Clinton treasury secretary Robert Rubin, now speaking in the capacity of top Wall Street banker, has castigated it. The Wall Street Journal has written among its nastiest-ever editorials in opposition.
It doesn't mean the war has definitively been prevented. But were it to go off, I have a straightforward prediction: The very thing that was supposed to save Bush's electoral prospects would badly backfire, would endanger global and US economic expansion and would - more surely than any Iraq war fallout - sink Bush.
(Copyright 2003 Asia Times Online Co, Ltd. All rights reserved. Please contact content@atimes.com for information on our sales and syndication policies.) |
