HONG KONG — Much of the developing world has long chafed against what they have seen as American exceptionalism in the international economic system. Taking up a theme originated by France’s Charles de Gaulle in the 1960s, they resent the ability of the United States to use the dollar’s dominant role as the reserve currency to buy foreign assets and fight foreign wars without needing to worry about financing them. Resentments have been fanned by Wall Street’s role in the current financial crisis and by memories of Washington-inspired harsh treatment of debtors in other crises, like the Asian one of the late 1990s.
For sure, the United States has been in an exceptional position and one that has enabled it to consume more than is good for it. Many countries, with China the most vociferous, wish for a more balanced world in which other currencies play significant roles in trade finance, capital flows and exchange reserves.
But while the cries against U.S. privileges ring out loud and clear, scant notice is taken of the exceptionalism successfully pursued by China. Beijing has so far insisted on maintaining both a pegged currency and controls on capital flows.
All of North America, Europe and Japan have no controls on capital flows and have fluctuating exchange rates. Ditto for South Korea, Taiwan, Australia, South Africa and most of trade-oriented Southeast Asia. India has some exchange controls but a floating currency, which is also the norm in South America.
This exceptionalism has helped China accumulate over $1 trillion in foreign reserves, that it naturally thinks should give it clout in the world. But where would China be if that exceptionalism were removed?
Its citizens would have higher wages and better living standards, but the government would be unable to boast of such huge reserves. As it is, China boasts of its reserves as the Soviets once boasted of their missiles.
China claims to want its currency, the yuan, to play a role in trade and capital flows. But Beijing continues to underwrite U.S. deficits by keeping its currency pegged and capital movements subject to controls, thereby preventing the yuan from playing an international role.
China may be no more prone than other countries — and a lot less than some — to protectionist actions breaching the spirit if not the law of the World Trade Organization. But the exchange rate and capital movement issues are far more important than individual products, be they tires or intellectual property.
From a domestic political viewpoint, the Chinese attitude is understandable. Stability is the leadership’s constant watchword. A freer exchange rate would hurt China’s ability to import jobs and export goods. A floating currency and absence of exchange controls could lead to the extreme fluctuations seen in Shanghai share prices. But other countries have to cope with these issues. Why not China?
Developing countries do not like to criticize China publicly. They welcome brakes on U.S. superpower, hope to benefit from China’s rapid trade growth and want Chinese support in pushing for better representation in international organizations. But do not imagine that a country — for example, Indonesia — coping with a totally open financial system and free currency at a time of global turmoil appreciates the exceptional favor that China still enjoys.
For sure, there are other reasons for global imbalances, such as oil prices and the unwillingness of Japanese and Germans to consume more. But any solution other than a sustained weak consumer demand in the United States must address not just the dollar’s exceptional status but also that of China.