US and China: Edging towards a compromise at G20?

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

Even though every state is going to the G20 summit with their own plan, only two matter: the United States and China, which seem to be edging towards a compromise on the currency front, argues Peter Zeihan, an analyst at Washington-based intelligence website Stratfor.

The following contribution is authored by Peter Zeihan, a political analyst at Stratfor.

"The G20 summit begins in Seoul, South Korea on Thursday. The topic of the day is currency appreciation [and] manipulation in the ongoing global economic issues. Every state is coming with their own plan but really there [are] only two that matter.

The first is the United States. The United States is the world's largest importer, the holder of the global currency, it's the largest economy by a factor of three, and that has actually been this state of affairs in now going back to at least World War II.

The United States has been large and in charge for that long, and none of the tools the United States has for manipulating its economic system and therefore the globe have changed. The kicker is the United States only depends on international trade for about 15% of its GDP. So should the United States manipulate the dollar to achieve any of its economic aims, it will be the country that suffers the least as a consequence from any sort of international chaos that follows.

The last time the United States did this was in 1985. The agreement that was signed was called the Plaza Accords, and in it the United States threatened Germany and Japan with retaliatory tariffs unless they purposefully, deliberately over the course of several years steadily changed the exchange rate of their currencies versus the dollar. Japan and Germany – two major global event powers – caved.

Country number two is China. China is if anything actually more vulnerable to American currency manipulation than either Germany or Japan was in 1985. It's much more dependent on exports, its capital structure is much less flexible and more vulnerable to outside intervention.

The United States could crush China in a currency war quite easily if push came to shove. However, the Chinese have influence in the international system that the US needs right now. The United States is trying to prevent conflicts in Iraq and Afghanistan from spinning out of control. It needs Chinese influence in Iran in order to make sanctions there work, and it certainly doesn't want problems in North Korea just to top everything off.

So the most likely outcome from the G20 summit is some sort of American-Chinese partnership on currency issues that does not require the Chinese to actually do very much. To have those two powers on the same page, there is really nothing else than anyone else in the world can do about it. So it looks like the two of them are edging toward some sort of compromise that doesn't require a lot of actual action and to revisit this issue in 6-12 months."

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