Let us begin with a few abstract matters. Suppose there is Country A, which has its own denominated currency and trades with many other nations, including Country B, which has its separately denominated currency. Suppose the former complains that the latter’s currency is undervalued, thus unfairly hurting the export trades of Country A and making imports to its insatiable citizens unreasonably cheaper than they should be. Then — a big leap of faith here — suppose the currency value of Country B alters, and gets stronger, and stronger, and stronger. What happens then?
Resist an immediate turn to President Obama’s recent two-hour meeting with Chinese Prime Minister Wen Jiabao in New York, where Obama pressed for the renminbi’s rise, and stay firmly with the abstract. What happens when Country B’s currency gets stronger and stronger in international exchanges, a move encouraged by, indeed urged on by, Country A’s government? Well, Country B’s exports get more expensive, and Country A’s exports get less expensive — and Country A’s politicians and businessmen go jumping for joy in the streets. What a triumph. Such statesmanship.
Is that all? Well, unfortunately, no, and for various reasons. The first is that Country B may possess materials like rare ores that Country A desperately needs and cannot find elsewhere in the world — so it now pays more for the same amount of such imports. And Country A may no longer possess companies that manufacture items such as children’s toys and bicycle gears and high-class binoculars, so it still needs to buy those goods from Country B, unfortunately at a higher price. Perhaps, over time, Country A may find entrepreneurs who will start manufacturing bicycle gears at home, but how long is “over time”? Ten years?
Secondly, and even more importantly in a rough-and-tumble world where nations are not just trading units but power-and-influence units as well, a country with a weakening currency starts to feel the consequences on the international stage. The first is the impact upon its international purchasing power, something that most American economists steadfastly decline to bring into their policy prescriptions, perhaps because they grew up in a dollar-denominated world and think only of domestic purchasing power. But that way of thinking is out of date.
Suppose, for example, a certain African country possesses deposits of vital minerals such as tungsten, manganese and cobalt, all of which are needed for state-of-the-art communications systems, including modern weaponry. These are minerals acutely necessary to America’s economy, but no less so to the economies of China, India, Japan, the European Union and other purchasers. What happens, then, when the value of the dollar sinks on international exchanges, and that of the renminbi rises? Alas and alack, that tungsten becomes more expensive for American industry, and much cheaper for a Chinese military-industrial complex whose appetite seems to grow every day. A weakened American dollar is a weakened America. Thank heavens this is all in the abstract!
But of course it isn’t. President Obama’s well-meaning administration, sniped at by trade unions on the one hand and Tea Party irresponsibles on the other, is pressing Beijing to revalue (that is, strengthen) China’s currency, and everyone in the United States appears to think that is a good idea. America will sell more to China, China will sell less to America, the trade imbalance will be corrected — and pigs might fly. Of course, there will be a U.S. company here or there that will benefit should the renminbi’s value rise by 20 percent. But I suspect that on the whole, the American economy will benefit far less because so much of it is structurally founded upon Chinese imports. What doth it profit America if, say, Walmart’s $8 made-in-China T-shirts rise to an epic $10 apiece? My naïve non-economist’s hunch is that it profits America not at all; it just adds to the trade deficit.
But the largest reason why the United States should not welcome the steady strengthening of China’s international currency value is geopolitical and, more crudely, military. For the historical fact is that no one nation’s currency (thus, purchasing power) has ceded ground to another’s without a consequent cession of international power and influence. As the coins exchanged by the merchants of Tuscany gave way to trades in the Dutch guilder, and that in turn to the French franc, and that to the pound sterling, and that to the U.S. dollar, so also did the wheels of world history turn, with currency traders ever seeking the next note and coin of strength. Currency traders have, of course, no loyalties. Now they are turning to Beijing; a few of them must have advised the Malaysian government recently to buy renminbi-based bonds, rather than the old, tattered dollar. The Gulf states are following suit. Just note, in general, the U.S. dollar’s diminished share of total global foreign-currency holdings compared with 25 years ago. It is not a pleasant story.
Reduced dollars means reduced influence. Forget about the whinings of the American middle classes as they emerged from their French and Italian cafés this summer with a considerable hole in their dollar-denominated credit-card accounts. That is not the point here. The point is that the more the dollar weakens (or other currencies increase in value, which is the same thing), the more that America’s international heft diminishes. You can’t possess international strength on a slipping currency. For decades, Japanese nationalists had a slogan something like “Strong Army, Big Country!” To paraphrase for today, the saying might be “Healthy Currency, Influential Nation!” Weakness or strength in one aspect of national power usually translates into the next.
In 1945, America stood at the apex of its relative power in world affairs. Almost everywhere else was in wartime devastation, or colonial backwardness, or economic doldrums. The United States possessed almost all of the world’s gold and foreign currency reserves, and everyone was screaming for dollars. Today that is no longer the case. At first, Western Europe and Japan caught up. More recently, the rest of Asia, including the massive states of China and India, have been catching up. American manufacturing has been in a 50-year secular decline, but the American consumer still wants his furniture, linens, garden tools, toys, kitchenware — all made in China. And the U.S. Treasury still needs to sell its notes to Asia.
Pressing the Chinese to revalue their currency is a fool’s errand. Beijing will simply despise America all the more, and look with amazement at the strong poker hand it has been dealt. Either the Yankees’ request will be politely brushed away, which is always an agreeable thing to happen, or the renminbi will rise, and the greenback weaken further, and then currency traders — and, more importantly, the national governments of Asia, Africa and Latin America — will take note and begin to un-tether their foreign currency holdings from an increasingly dodgy dollar.
But will anyone in Washington, or at the Fed, listen? Right now, they seem prepared to give a further stimulus (sic) to the troubled economy by further outpourings of federally printed notes, like some desperate Latin American treasury in the 1970s. And look what happened to them.
Clearly, there is no easy option for a beleaguered Fed or a beleaguered White House, and a non-economist like myself feels it would be false to offer policy prescriptions. But the strategist and historian feels deeply uneasy at the idea of a much stronger Chinese currency, and in consequence of a much weakened dollar. That would seem like pushing a whole lot of your remaining poker chips across the table, to the guy who already holds a lot more chips than you do. It is not a good idea.
Paul Kennedy, professor of history and director of International Security Studies at Yale University and the author of The Rise And Fall Of The Great Powers.