Macroeconomic Rebalancing: China and the US at the G20

Analysis on the issues to be discussed at the G20 Leaders Summit in Cannes on November 3-4 and their implications for the global economy.

There are weighty expectations for the G20 Leaders Summit in Cannes, France. US President Barack Obama and World Bank President Robert Zoellick have both issued calls for the gathering to come to the rescue of the world economy.

The most significant task of the G20, since its 2008 elevation to become the principal global forum for economic discussion, has been to foster a global economic rebalancing. Some advocates would disagree with that point. President Obama lauded the G20 for its role in saving the world economy through coordinated stimulus. As President Zoellick noted, however, “as fiscal deficits have since surged, it has proved easier for world leaders to spend large sums than to tighten belts.” Countries needed little prodding from their fellows to adopt generous stimulus programs. In many cases, the stimulus programs that were included in the London G20 recovery plan were either fully adopted or well underway before that meeting.

The real challenge for international cooperation comes when there are painful but necessary tasks to be done. A gathering will prove its worth if it can defuse tensions and persuade participants to undertake reforms that none could easily adopt on their own, but that may be palatable if done in a coordinated fashion.

The challenge of rebalancing the global economy falls into this category. In the run-up to the global financial crisis, prominent Asian countries – most notably China and Japan – ran large current account surpluses while the United States ran a large current account deficit. In 2005, then-Federal Reserve Governor Ben Bernanke argued that a savings glut from Asia drove the deficits in the United States. While Bernanke subsequently argued that domestic factors in the United States were the primary cause of the global financial crisis, he noted that the low interest rates that stemmed from the savings glut helped exacerbate the problems.

If this were an instance in which Asia simply gained at US expense, it would not seem very amenable to a cooperative agreement. Yet China, in particular, has felt its own pressure to rebalance. The most salient indicator of the extent of China’s imbalance is its accumulation of $3.2 trillion in foreign exchange reserves. In April, People’s Bank of China Governor Zhou Xiaochuan said “Foreign exchange reserves have exceeded our country's rational demand, and too much accumulation has caused excessive liquidity in our markets, adding to the pressure of the central bank's sterilization.” Put more simply: the imbalance threatens China with inflation. Chinese leaders have also expressed concern about the growing threat of capital losses on foreign exchange holdings, should the US dollar depreciate or interest rates rise.

In this light, there would seem to be a role for the sort of global cooperation the G20 could offer. The United States could commit to cut its budget deficits and rein in its borrowing, while China could commit to appreciate the Renminbi (RMB) and reorient its economy from investment toward consumption. Each side could then claim a degree of victory to offset the pain of adjustment: China could argue that it had won concessions to ensure the value of its substantial holdings of US debt, while the United States could argue that it had won concessions to boost external demand at a time when budget cuts might otherwise slow the economy.

With plausible prospects for international macroeconomic coordination, what has happened in practice?

In April 2009 in London, G20 leaders called for a new consensus on how to promote sustainable economic activity. In Pittsburgh, later in the year, they pledged to seek “strong, sustained, and balanced growth.” Unlike the call for stimulus, such a plan would require some degree of political discomfort to carry out. This would provide a much better test of the potency of the G20.

So far, the G20 has not passed the test. Subsequent discussions about global rebalancing have devolved into tedious arguments about how to define terms. Those disagreements appear very much like an effort to stall any real progress. US efforts to back transparent criteria for identifying countries with persistent imbalances – an obvious first step toward remedying those imbalances – have been blocked. This has left the G20 looking somewhat toothless. Given the plausible outline for a grand political bargain in support of rebalancing, as well as the pledges by leaders to seek such an agreement, how could they have fallen so far short?

The most plausible explanation lies in domestic politics. The United States and Europe have a history of accepting domestic political concessions to win international approval and reciprocal acts. This has occurred most prominently in repeated global trade rounds under the General Agreement on Tariffs and Trade (GATT). Japan has also actively participated in these rounds and Japanese analysts have occasionally agreed on the value of foreign pressure (gaiatsu) in pushing necessary reform.

China has done this, too. It explicitly sought membership in the global trade community as a way of driving domestic economic reform, completing lengthy accession negotiations and joining the World Trade Organization in 2001. But in recent years, the openness of Chinese leaders to the constructive use of foreign pressure seems to have diminished substantially.

This was most tellingly illustrated in June 2010. On the eve of the G20 summit in Toronto, China reintroduced flexibility in its valuation of the RMB, meeting a major concern of its summit counterparts. Rather than accept accolades for such a constructive act, Chinese leaders were emphatic that the timing of the change was a coincidence and that the exchange rate was a domestic Chinese concern. This failure to accept credit seemed to illustrate the paramount importance of demonstrating Chinese independence and imperviousness to foreign concerns. Presumably, this reflected a very different domestic political calculus, one that placed little value on winning foreign approval. The approach simultaneously made China seem truculent and made the G20 appear ineffectual.

It is certainly possible to achieve global economic rebalancing in the absence of cooperative agreement. China will likely appreciate its currency as a means of warding off inflation. The United States will likely address its borrowing as a means of warding off potential future debt crises. Yet the unwillingness to strike a cooperative bargain will make these changes politically more difficult, at least in the West. It will undercut the plausibility of using the G20 as a forum to address concerns and will increase the likelihood of bilateral conflict, as through US currency legislation.

The weighty expectations that this week’s Cannes summit will serve to save the world economy are undercut by key participants’ unwillingness to take difficult steps, as promised in past communiqués. All of the G20 participants are subject to domestic political constraints, although the nature of those constraints can differ markedly across very different political systems. If domestic politics offer little or no reward for cooperative behavior and reciprocal concessions, there is little hope for significant progress from global summitry.

The views expressed in this article are the author's own and do not necessarily reflect Fair Observer’s editorial policy.

For more than 10 years, Fair Observer has been free, fair and independent. No billionaire owns us, no advertisers control us. We are a reader-supported nonprofit. Unlike many other publications, we keep our content free for readers regardless of where they live or whether they can afford to pay. We have no paywalls and no ads.

In the post-truth era of fake news, echo chambers and filter bubbles, we publish a plurality of perspectives from around the world. Anyone can publish with us, but everyone goes through a rigorous editorial process. So, you get fact-checked, well-reasoned content instead of noise.

We publish 2,500+ voices from 90+ countries. We also conduct education and training programs on subjects ranging from digital media and journalism to writing and critical thinking. This doesn’t come cheap. Servers, editors, trainers and web developers cost money. Please consider supporting us on a regular basis as a recurring donor or a sustaining member.

READ MORE IN THIS 360° SERIES

Leave a Reply