View 2: rather than have a G7, it assumes we are moving toward a G2, being China and the US. Some project China to be a hegemon in the making which will one day over-power the US
View 3: As Hank Paulson argues, “the strength of the relationship between the US and China will be critical to the functioning of the G20 and global cooperation” (Walter)
China and the US and the burden of adjustment
Brief History. Post WWI the UK and Germany were in debt, while the US and France were in surplus. Keynes, being the representative of the UK, fought for a system which allowed the burden of adjustment to be distributed equally, as primarily after the war, the burden was focused mainly on the debtor countries. Keynes proposal was deemed to be too radical, and the US counter-proposed the “scarce currency clause”. Gave money in the form of Marshall Aid, but did not implement any long term surveillance framework within the IMF. The IMF was too weak to adequately balance the burden of adjustment. In addition, “there was very little the IMF could do to discipline large surplus countries” (Walter) The currency manipulation clause was passed, but failed to increase the power of the IMF significantly. In 2007, as a result of a lack of enforcement on the burden of adjustment, in turn, countries that may have been manipulating currency no longer needed to show intent to grant IMF action. Bilateral negotiations with the US offered temporary advantages, but did not pay off in the long run.
In order to place more of the burden of adjustment on surplus countries, the US:
Convinced China to appreciate the Renminbi relative to the dollar
Frequently threatened unilateral sanctions on the global economy, especially China and Japan for pursuing “mercantilist” policies
The Pittsburgh Agreement. The Pittsburgh Agreement was negotiated in the third leaders’ summit. They:
Agreed on a framework for strong, sustainable and balanced growth
Committed itself to a MAP (mutual assessment process), which would ensure compatibility of national macroeconomic policies
Fostered a new attitude between the US + China
However…
Talks didn’t last very long afterwards, and commitments weren’t kept
China didn’t want to crack under pressure, and blamed the US for its loose policies
Geithner’s Proposal. Geithner imposed a limit of 4% of GDP for currency imbalances; the proposal has many reasons why it should be accepted such as:
It addressed the problem of the current account imbalances
Allowed for a range of policy change besides altering the exchange rate
The target (of 4%) would be measurable and transparent
Attempted to clarify what was known as “fundamental disequilibrium”
Japan and Germany saw it as unfair, and opposed it.
Global Imbalances. Why hasn’t there been an agreement?
Lack of a will to agree between China and the US
US has been stuck with presidents unable to lower the fiscal deficit
Consumption is rising while saving is falling
Asymmetrical imbalances, especially in the case of the US who is eager to impose adjustment on everybody but itself
by
xxx182xxx (student)
