US must amend its currency policy to ease deficit

By Liu Zhiqin Source:Global Times Published: 2018/5/23 21:38:40

Illustration: Luo Xuan/GT


Vice Premier Liu He has returned to Beijing following trade talks in the US, and the US will send a high-level team to Beijing for further discussions next week. The frequency of these official exchanges shows that China and the US are trying hard to find a solution to the recent trade tension.

When the second round of trade talks finished last week, a number of media reports were hailing the end of the trade war threat. Some even said that China had won the first round of the negotiations with the US.

This conclusion is totally wrong, and the idea that the trade friction has been resolved is groundless.

There hasn't been a trade war yet, just a series of warnings for the two countries to take necessary measures to avoid the outbreak of such a trade war.

There have been some rumors saying that China would agree to reduce its trade surplus with the US by $200 billion. This is obviously a "misunderstanding." China might agree to import more goods and services from the US, but there are three reasons for this. The main one is the need to satisfy the requirements of Chinese people for a better life; the second is to promote high-quality economic development; and the third is to help people in the US have more jobs and a lower trade deficit.

There is also uncertainty about the true goals of the US, such as whether it aims to politicize the trade deficit issue, and whether the purpose of tariffs is to hold back China's development.

Of course, there are still more reasons for the two largest economies in the world to engage in closer cooperation, which would benefit the global market.

The trade talks between China and the US are just steps toward the final destination: peaceful and balanced trade relations. In order to achieve this, we have to find the real reasons for the huge trade imbalance between the two countries.

Some experts have explained the deficit on the basis of trade volume. But the real culprit is the monopoly of the US dollar in the global market. It is very important to clarify the relationship between the trade deficit and the current US policy.

US Secretary of Commerce Wilbur Ross has claimed that it is unfair for the US to absorb in its deficit the cumulative trade surplus of the entire rest of the world. But he didn't say why this is the case.

The reason is that all countries have to use US dollars to settle payments. The dollar is the main currency for national reserves used for international trade, and this pushes countries to export more goods to the US. Under this currency arrangement, a trade imbalance with the US is hard to avoid, since less exports to the US means less dollar income.

So unless the dollar plays a smaller role in the international market, reducing the US trade deficit will be hard to achieve.

The US should try to avoid over-supply of the dollar, and allow greater use of other currencies such as the yuan and the euro to promote more balanced currency supply. Then the trade deficit would be properly handled by the global market. In order to solve its trade deficit, the US must amend its currency policy. 

A trade war would certainly be bad news, but the US could also resort to further protectionism by prohibiting overseas investors and companies from entering its market.

From the global point of view, building this kind of trade wall would be nearly as bad as a trade war. Hopefully the US government will not decide to isolate itself from the outside world.

The author is a senior fellow with the Chongyang Institute for Financial Studies at Renmin University of China.

Posted in: INSIDER'S EYE

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