There is a stark difference between the financial landscape of the late 20th century and the one facing the United States today. Twice in the last ten years markets of the United States have fell victim to massive bubbles (dot-com, housing) that were largely inflated by greed and overzealous capitalism. Now, the world is more apprehensive towards open markets, globalization, capitalism and taking on risk.
The new finance also has another chess piece added to the board; this new piece bears a striking resemblance to a dragon and hails from the East. Say hello to China, and the vast resources, human and otherwise, that she brings to the table. Paul Krugman wrote just the other week that the United States must meet China head on regarding the yuan. In economic terms, he provides great support for his argument, but I am afraid he is misguided regarding the political implications of that course of action. The other side of the coin is Ryan Avent, a blogger for the economist, who makes some wild claims here.
The new China must be assuaged, not slapped. It will take time and clever strategy to convince the Red Dragon to make any moves. The chest thumping, cruise missile waving days of President Bush are over, and by Godsend we have a more charismatic leader to engage the East (any political affiliation notwithstanding, Obama is the obvious superior to Bush in foreign policy).
Given his recent victories in nuclear arms with Russia (which for now appears to be his greatest tangible foreign policy achievement) and health care reform, Obama now must focus on the looming spectre of China. His next steps must be focused, graceful and choreographed. Over the next eighteen months, the relationship between the United States of America and the People’s Republic of China will take the form of a dance; welcome to the China Tango.
The similarities to dance are obvious. As with any good dance partner, President Obama must lead China without making them feel as though they are being led. The steps must be calculated and planned; any arrogant moves or showy gestures will surely enrage a company that is trying to solidify itself as a world power. In order for President Obama to succeed he must first do the following things.
1. Engage other world leaders - this step would be very much the opposite of what the prior administration would have done. The discussion does not need to be public, but should be material. If a country does not have the fortitude to support a revaluation program for the yuan, then leave them at the kid’s table.
2. Design a program to revalue the yuan gradually - at the present, there is absolutely no incentive for China to revalue their currency to a market price. Their exports depend very much on the depreciated remnibi, and if they were to immediately revalue to market, the effect on Chinese industry would undoubtedly be negative. The only way to convince them to undertake a revaluation process is to coat it in a way that seems to make China stronger. In this particular example, the yuan is basically pegged to the dollar. Sell the change to China in a way that makes them feel more independent and powerful on a global scale.
In my opinion, these would be the first two steps to take towards engaging China. Obviously, the administration has already attempted to engage China. Now, they must be more proactive in procuring allies to aid them in the discussion. It won’t be a short talk and in all likelihood it will strain relations with China, but it is necessary that the administration takes these steps or developed economies will continue to struggle.
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