During confirmation hearings for his nomination as U.S. Treasury Secretary, Timothy Geithner sparked a minor controversy. In his testimony to the Senate, Geithner was unusually critical 鈥� at least for a leading U.S. policy official 鈥� of Chinese exchange-rate policy, suggesting that Chinese authorities were manipulating the renminbi. Two months later, the Chinese central bank governor, Zhou Xiaochuan, issued a response of kinds. He suggested that the international community should introduce a new reserve currency, in order to allow surplus states (like China) to diversify their holdings. At about the same time, a UN panel of experts mooted a similar idea.
Remarkably, this is the closest that the world’s major powers have come to seriously arguing about exchange rates during the past year and a half 鈥� that is to say, as the international financial crisis morphed into the deepest global economic recession since the 1930s. True, last fall Iceland faced a run on its currency; so have certain European states outside the eurozone since then. More recently, Swiss authorities took the unusual step of intervening to resist upward pressure on their currency, prompting dark talk of competitive devaluations. But, at least so far 鈥� that is to say, as of late March 2009 鈥� clashes over exchange rates have figured surprisingly little in global crisis discussions. This is especially remarkable when compared to the divisive arguments about exchange-rate policy that accompanied the much smaller economic crises of the 1970s, 1980s and 1990s.
At first blush, this is a good thing. Exchange-rate controversies among states with large economies tend to be intractable, and today’s policy agenda is already overloaded. Should the external value of the dollar suddenly become a subject of serious contention among the major world powers, the ensuing scene is not likely to be edifying. So perhaps we should simply be grateful, and leave well enough alone.
But that begs the obvious question: if little is to be gained by raising the question of exchange rates, then why did the incoming Secretary of Treasury 鈥� in carefully chosen words, delivered as part of his written testimony 鈥� choose to do so? The answer, it turns out, has to do with an underappreciated connection between the international trade and monetary agendas.
Efforts like those of Mr. Geithner to “talk the dollar down” turn out to have a long and distinguished pedigree. Indeed, trade liberalization flourished in the 1970s and 1980s in part because the shift to a flexible exchange-rate regime allowed successive U.S. administrations to engage in such efforts, and thus to forestall periodic protectionist pressures in Congress. By allowing (and sometimes even encouraging) temporary and timely depreciations of the dollar, successive administrations helped keep the U.S. market open to foreign trade. Doing so allowed liberal international trading arrangements to be maintained and even expanded.
Understandably, such actions also fostered substantial controversy abroad. The United States’ foreign partners resented the dollar’s role, and especially the U.S. government’s ability to shift the costs of economic adjustment onto them; and over the course of the past two decades, they therefore took steps to level the monetary playing field. Chief among these developments were the introduction of Economic and Monetary Union (EMU) in Europe and the more or less concurrent adoption of an explicitly defensive exchange-rate strategy in much of east Asia 鈥� the latter characterized by a willingness to stockpile dollar assets rather than to permit national currencies to rise in value.
During the run-up to the current economic crisis, the consequences of these two developments tended to be offsetting, at least insofar as global payments imbalances were concerned. The failure of east Asian currencies to appreciate significantly against the dollar contributed mightily to those imbalances; meanwhile EMU increased European tolerance of dollar depreciation, since this no longer disrupted relations within the Single Market to the same extent it once did. Europe therefore allowed itself to bear the brunt of international economic adjustment, relieving at least some of the strains on the U.S. current account.
This was never a sustainable arrangement. Yet precisely because monetary authorities in both Europe and Asia had become marginally less sensitive to movements in the dollar’s exchange rate, promoting the necessary international economic coordination to resolve this problem became more difficult. In particular, U.S. authorities could no longer rely as completely as they had in days gone by on accommodating policy adjustments being adopted elsewhere in order to avoid undesired movements in the exchange rate of the dollar.
As a result, the practice of occasionally talking the dollar down is not working particularly well, and certainly not as well as it once did, as an instrument of U.S. foreign economic policy. Time once was that America’s leading trade partners in both Europe and Asia were deeply and asymmetrically vulnerable to a downward shift in the dollar’s exchange rate; and, once faced with such a prospect, they would generally agree to stimulate their domestic economies. Doing so tended to moderate the appreciation of their currencies against the dollar, thus protecting national export industries 鈥� just as their governments intended. At the same time it would increase their populations’ appetites for U.S. imports, which in turn served Uncle Sam’s purposes just fine. But times have since changed, with the incentives now greatly reduced for either Europe or Asia to alter domestic policies in this fashion in response to U.S. initiatives.
Geithner’s description of Chinese exchange-rate practices as “manipulative” in his Senate testimony must be understood in this context, as it raised the stakes of resisting U.S. monetary policy leadership. Time will tell whether this tactic was wise or foolish. Presumably it was the first move in a playbook that contained more than one element. If so, much will depend on steps two and three.
The larger point is one of an eroded capacity for U.S. leadership in monetary matters. As former U.S. Treasury Secretary John Connally once put it, “It’s our currency but it’s your problem.” Connally addressed himself to a foreign audience, but he might as well have been speaking to future U.S. governments. For the better part of three decades, periodically talking down the dollar suited the political needs of sitting administrations, while greatly annoying America’s partners. With the introduction of the euro, and the shift in China’s exchange-rate policy, the chickens have finally come home to roost: the U.S. is finding it increasingly difficult, if not impossible, to persuade others to follow its monetary policy lead.
It is this changed situation that accounts for the relative absence of emphasis on exchange rates, and in particular on the value of the dollar, in current global economic discourse. The Europeans tend not raise the issue, at least not nearly as vociferously as they have in times past, because they do not care about the dollar nearly as much as they once did; EMU allows them this luxury. The Chinese do not raise the issue, because to a large extent they already control the dollar’s exchange rate with the yuan. And officials at the U.S. Treasury, despite desiring an orderly depreciation of the dollar against east Asian currencies, are normally reluctant to raise the issue either. Why? In part because they do not wish to draw attention to the fragility of the dollar’s position, given existing international imbalances; but also because doing so is no longer as effective a policy measure as it once was.
Mr. Geithner’s Senate testimony was therefore unusual, especially by the standard of recent years; but so far it has done little to bring about Treasury’s preferred outcome. Instead, the world’s leading economic powers feel at greater liberty than at any time since 1945 to pursue the monetary policies of their own choice, with scant regard to the policies behind the greenback.
There would be problems enough were the consequences of this development limited to currency markets. But they are not. Instead, to the extent that they are deprived of the ability to talk the dollar down, U.S. policymakers lack an important policy instrument once used to help stave off protectionist pressures at home. With those pressures fast mounting, this absence will be keenly felt.
In times past, using exchange-rate politics to influence U.S. domestic discussions of trade policy may not have been very pretty, but it was, at least on occasion, effective. After all, the chief alternatives available to the White House in seeking Congressional support for its trade agenda 鈥� among them accepting increased protectionism now, in exchange for promises of increased liberalization later 鈥� are not especially pretty either.
Hence the irony of the current situation. In changing their monetary policy frameworks, the last thing either the Europeans or the Chinese intended was to undermine the U.S. commitment to free trade. But that may well be the end effect 鈥� in which case our currency will have become everyone’s problem.
David M. Andrews is Professor of Politics and International Relations at 61传媒. This article draws from the last chapter of his most recent book, Orderly Change: International Monetary Relations since Bretton Woods (Cornell University Press, 2008).