Barack Obama finally succeeded in uniting the world - just not the way he intended. At the G-20 summit in Seoul, countries almost universally rejected America's ideas for correcting current-account imbalances as well as its second round of quantitative easing (QE2). After an electoral shellacking at home, the U.S. president suffered a diplomatic shellacking abroad. It was one of the darker hours of American economic diplomacy.
For years, the United States has criticized China for its unwillingness to allow the renminbi to appreciate. The undervalued Chinese currency is a key driver of America's large and growing trade deficit with China. It is therefore justified to call the Chinese behavior "currency manipulation." And it is not even the only tool with which the country's authoritarian government artificially improves the competiveness of its economy at the expense of others in the global marketplace.
Rather than developing a common front against the Chinese manipulators, the United States chose to expand the argument and turn on all surplus countries - thereby assuming that all surpluses are created equal. Germany is the poster child of America's drive against nefarious surpluses. But that country's sizable trade surplus does not stem from tinkering with its currency. The euro is floating freely. The surplus is not based on wages that the government artificially depresses. Workers enjoy some of the highest wages and best benefits in the world. Germany is not holding back in domestic demand for goods and services. While this year's growth spurt has initially been attributed to the country's export prowess, domestic demand is currently responsible for well over half of economic growth. Claims that Germany engages in beggar-thy-neighbor policies vis-à-vis its European partners are equally spurious. Germany's economic revival is restarting growth across Central Europe thanks to closely integrated supply chains that link Eastern European firms to German companies.
The simple truth is that Germany has built the most competitive economy in the eurozone. The country's success as an exporter is based on the values of democratic capitalism. That's a far cry from China's authoritarian capitalism. The Obama administration (and legions of analysts across America) keep lumping both countries together - a case of doubtful analysis that triggers bad politics.
In Seoul, even the other countries of the G-20 were not very receptive to the Obama administration's onslaught. America's argument for rebalancing has always rested on shaky ground. The Carnegie Endowment's Uri Dadush and Vera Edelman have beautifully described the contradictions: "Here was the country responsible for the greatest consumption and construction binge in history declaring things must change; that other countries should mend their ways, relying less on lending to the United States and more on their own spending; that U.S. exports would double in five years, and that the rest of the world's currencies must appreciate to help out."
In order to support its case, the United States intends to print money to the tune of $600 billion. This glut of greenbacks will create a new asset bubble and has already inspired or legitimized new capital controls in emerging economies like Indonesia and Brazil. And it will leave the euro as the only major currency that is not currently manipulated downward.
America's actions undercut its president's pleas to the world. Lectures about macroeconomic virtue sound dangerously hollow. They are reminiscent of American presentations about the importance of human rights in the age of Guantanamo and Abu Ghraib. The immediate effect in Seoul was the spontaneous emergence of a G-19, with the odd bedfellow of a Sino-German alliance at its core. The tone reached a fever pitch when German finance minister Wolfgang Schäuble called U.S. policy "clueless."
While America's argument about the Chinese currency may be valid, it is also a distraction. America does not only have a bilateral trade deficit with China, it has a multilateral trade deficit with most of its important partners. Not only is Chinese currency manipulation hurting America; it is America's own lack of competitiveness that is hurting America. There are just not enough goods and services to export that the world wants. Which is why the argument about rebalancing is, at best, one-sided. It assumes that balanced trade is desirable and surpluses are just as bad as deficits when, in fact, deficits are worse. They point to weaknesses in the domestic economy. These weaknesses need to be corrected. That is the task at hand, and the Obama administration has, so far, not given an indication that it is up to the task. It should make goods, not dollar bills. It should cut its deficit, not the value of the dollar. Last week, the co-chairmen of the president's deficit commission came up with a set of recommendations for painful cuts. That's a start. In the spirit of the commission, the United States should stop pointing fingers at its democratic peers and instead start doing its homework. Then and only then will America be able to rebuild the credibility of its global economic leadership.
