A grand bargain to solve global imbalances
Michael Pettis, a professor and China expert at the Carnegie Endowment for International Peace, has put together a thorough and informative look at all things U.S.-China trade. It’s well worth reading and watching the entire thing, but here’s a few highlights that jump out:
* We’re likely to see a significant increase in global trade tensions
* China will probably allow the renminbi currency to rise, but not by a lot
* There is a way to resolve those huge global imbalances but it will be painful and the chances of mustering the political will — in China, the United States and Europe — look slim.
A bit more on that last point: Pettis thinks that those three players need to “come to some kind of grand agreement.”
“Europe and the United States need to understand that China simply can’t adjust quickly enough. In an ideal world, the leadership of the three economies would get together and work out a plan—six years, eight years, however long it took—in which China committed to taking the necessary steps.
“Most importantly, raising the value of the currency, liberalizing interest rates, and liberalizing the banking system, that would go a long way to rebalancing the Chinese economy. It will be painful and it will be difficult, but it’s what China will need to do one way or another.
“In exchange, in order to make the difficulty much less, the United States and Europe would commit to slowing down their own adjustments. The United States would continue to run large fiscal deficits in order to slow down the increase in savings in the United States. And they would commit to keeping their markets completely and totally open to Chinese goods, so that the adjustment in China could be slowed down over a seven or eight year period. ”
Pettis says he’s a “little bit pessimistic” that the key players can get to that point.