Simon Johnson to China: Do it, I dare ya

Hillary Clinton and Tim Geithner continue their high level talks with the Chinese government, the Strategic and Economic Dialogue, today. The meetings are being heralded as a replacement for the G8 summits of the past (some observers have called the US-China relationship the “G-2”). The two countries will be discussing a whole host of issues included North Korea and climate change but the economic relationship between the two, especially the large trade imbalance, is at the forefront.

Simon Johnson gives his take on what the US will try to achieve at the dialogue and how this strategy is flawed. The money quote:

Irrespective of underlying cause, any country that runs such a current account surplus is implicitly taking a great deal of currency risk – China was in effect deciding to take the biggest ever official long-dollar position.  The idea that the US government should spend time reassuring them is somewhere between quaint and not good strategy.

Johnson then goes on to make an interesting point about China dropping large amounts of T-bills. The resulting devaluation of the dollar would make our goods more export competitive and help the US economy begin to pull out of the current recession. Plus China would lose a considerable amount of money if they purposely drove down the price of T-bills. They would inevitably be stuck with some dollars since they own $700 billion worth of Treasuries and would have a hard time finding such a large amount of buyers.

To build off Johnson’s claim of currency manipulation, read this incredibly interesting1 post by Brian Setser on the effects of China’s currency depreciation.  The dollar can’t regain “real strength” against the yuan unless the Chinese government starts to curb its currency intervention ASAP. However I don’t think the US should take this case to the WTO, or at least yet. Summits like the one the US and China are currently engaged in are the best opportunity to bring up issues like this one without causing a ruckus. I’ll hedge my bet by saying that if China continues to manipulate its currency then the WTO is the way to go (I’m just not sure how long is enough)

1 And by interesting I mean full of charts, graphs and discussion of year on year changes in exports and imports. I told you I like this trade stuff

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