Hardly a minute had passed when I received an email from a friend with the following queries with the clarification that they were not rhetorical statements disguised as questions but genuine questions seeking answers:
So… The $ 11 Trillion question is… Why did the US do it?
At what point did they realise they were enabling some bad habits like currency manipulation and debt addiction and IP theft?
And what have they done about it beyond bluster?
And holding the mirror to oneself is not easy! So, I would like to ask…
How has the US gamed the openness of the international trade and finance regimes in order to secure profit for its corporations… And to push its foreign policy agenda?
I know intuitively that China’s gaming of today is somewhat more dangerous than the historical wrongs of the US. But how do I explain this in a calm, logical and data-driven manner?
Actually, the last question is a genuine question, not rhetorical. Any insights would be appreciated.
I understand your questions and I did not think that it was rhetorical.
Indeed, I hold no brief for American behaviour. I was stating it as a matter of fact. Before Americans, European powers, including the UK, have resorted to such selective patronage of nations and policies, garbed in the rhetoric of open markets.
On currency manipulation too, Western nations are not paragons of virtue. Raghuram Rajan is correct that zero or negative rates too are a form of currency manipulation.
Post-1980s United States is all about capital at the expense of labour and therefore, trade deficits and financial openness were instruments in aid of boosting returns to capital. Combination of lazy and predatory capitalism. Have written on numerous occasions on it and a book is coming out later this year, I hope.
That is what emboldens nations like China to cock-a-snook at the international order because its guardians and creators have turned unilateral and unfair exploiters.
>> I know intuitively that China’s gaming of today is somewhat more dangerous than the historical wrongs of the US.. But how do I explain this in a calm, logical and data-driven manner?
Fair question. My responses:
(1) The United States did play by international order for at least two decades, that it helped craft after WW II.
(2) The UK lived up to the rules of the Gold Standard before it demanded others countries do so. It tolerated a painful and long period of deflation to restore competitiveness instead of resorting to devaluation (19th century)
(3) Despite a valid and cynical evaluation of U.S trade imbalance, the fact that it has run persistently large (and even increasing, on occasions) trade deficit is a valid testimony to its relative trade openness. Its M&A track record on foreign companies acquiring American companies is far better than that of China.
(4) After 2008, barring the propping up of SIFI, it did allow its banking sector to restructure. That is why its banking system is arguably more resilient than that of Europe or China’s.
(5) Paul Volcker risked two recessions in two years to control overheating and inflation.
>> Why did the US do it?
I do not think I have answered it. I doubt if John Pomfret too answers it convincingly.
Boils down to several factors:
(1) Japan was becoming too successful for its own good. A counterweight. The U.S. does ensure that its potential rivals balance each other. (Example: Bet on India but make sure that Pakistan is there to keep India checked.)
(2) ‘Capitalising’ China will help neutralise the Soviet Union and also remove the long-term threat of communism
(3) Taiwan was too small to be of benefit to the United States economically – for its financial interests.
(4) Not to leave out a certain naive idealism or hope that getting a potential ‘rogue’ nation into the system will make it a responsible stakeholder and it cannot be a threat to a system (that still largely served Western interests) that it is part of.
Finally, all these are open to debate and different interpretations and weights.