It’s a bold call to draw parallels between current great power dynamics and pre-World War I tensions in Europe, but that’s exactly what Telegraph columnist Ambrose Evans-Pritchard did yesterday looking at the ongoing spats between the US and China.
‘China has succumbed to hubris. It has mistaken the soft diplomacy of Barack Obama for weakness, mistaken the US credit crisis for decline, and mistaken its own mercantilist bubble for ascendancy. There are echoes of Anglo-German spats before the First World War, when Wilhelmine Berlin so badly misjudged the strategic balance of power and over-played its hand.’
It’s perhaps a little early to be drawing these kind of comparisons, but the issue that he picks up on as arguably the most critical at the moment is pressure on China over its currency. He’s in good company—Nobel Prize winner Paul Krugman also took up the issue in his New York Times column Sunday, following up on an earlier post calling for a tougher US response.
‘Some still argue that we must reason gently with China, not confront it. But we’ve been reasoning with China for years, as its surplus ballooned, and gotten nowhere: on Sunday Wen Jiabao, the Chinese prime minister, declared — absurdly — that his nation’s currency is not undervalued. (The Peterson Institute for International Economics estimates that the renminbi is undervalued by between 20 and 40 percent.) And Mr. Wen accused other nations of doing what China actually does, seeking to weaken their currencies “just for the purposes of increasing their own exports.”
‘But if sweet reason won’t work, what’s the alternative? In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.’
I’ll be speaking to some analysts myself this week and will share their take on all this when I get the chance.