Currency row reveals American anxieties

Here is my latest comment from Fund Strategy.

Rows about currencies are rarely just about currencies. They usually symbolise broader tensions between countries.

The spat between America and China certainly has an economic dimension. Many Americans, including influential politicians, see China as largely to blame for America’s substantial trade deficit. In their view China is following a mercantalist policy by keeping its currency artificially low to boost its exports.

Chinese officials have retorted that it is America that is being protectionist. By putting pressure on China to revalue the renminbi they are trying to give an unfair advantage to American producers.

On balance the Chinese are right. America’s yawning deficit is more a result of its own weakness rather than Chinese strength. The share of manufacturing in American GDP has fallen from about 30% in 1965 to about 12% today.

The problem is not so much abandoning old sectors but failing to sufficiently develop new ones. This has left an unbalanced economy that finds it hard to compensate for foreign imports by bolstering exports. American commentators who prefer to take their country’s side are often putting patriotism before objectivity.

In any case, if the Obama administration officially brands China as a “currency manipulator” this month it will raise tensions further. Even if it does not, the conflict is likely to resurface at some point.

But the row between the two countries is about more than economics in the narrow sense. America is becoming increasingly anxious about losing its status as the world’s top power. Although such a transition is still far off it looks visible on the horizon.

In contrast, China’s concerns are more narrowly economic. It is content to carry on growing rapidly so as to bolster its economy and raise living standards.

For all of China’s spectacular growth in the past three decades it is still a relatively poor country. Its GDP per head is comparable to countries such as Algeria and Egypt. It is also still a largely rural nation.

This mismatch between perception and reality in relation to China is easy to explain. Attention has focused on its rapid growth but it is often forgotten that it started from an incredibly low base. In addition, its huge population means that its GDP is high in absolute terms even if income per head is low.

The row about the renminbi is mainly a result of American insecurities. America, rather than China, is much more likely to destabilise the world economy with an over-reaction to what it perceives as threats.

* NOTE: Since this article was written the US Treasury department has announced it has postponed its decision on whether to label China a currency manipulator.