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ANALYSIS
And now, currency
wars
By Marc Erikson
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
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