The US Congress has often given myopia a bad name, but its efforts to stop CNOOC from buying Unocal and to bully and bluster China into floating the RMB have gone beyond that. They may reverberate in history as the small causes that lead to global chaotic effects.
American legislators still operate on the principle that "all politics is local."
The farsighted in Congress see all the way to their next election, but most see only to the next campaign contribution. They think that grandstanding for voters and funders is all they need. But while their politics may be local, their economy is definitely global. The Chinese don't have votes – they have US Treasury bonds, hundreds of billions of them.
China and the other Asians, who had all shown some signs of being tired of the poor returns on US treasury bonds, had sensibly considered investing in better performing dollar assets, such as Unocal shares. If that avenue is blocked by Congress, then Beijing bankers really have to ask themselves if there were not better returns to be had from other currencies. Indeed, they should probably have been asking that question for some time.
Congress's xenophobic attempt to thwart the Unocal bid directly contradicts everything they say to the rest of the world. It also contradicts current American interests, which are dependent on the recycling of the dollars paid for exports back into the US economy.
The US Congress is now in the invidious position of getting what it wished for, and we all know from fairy tales that what you get is not always what you really wanted. And the immediate result is a falling or stagnant dollar, and more declines are likely to come.
In contrast, CNOOC showed maturity in pulling its bid for Unocal, even as Congress showed its utter detachment from economic reality by snapping at the hands that have kept them afloat for the last four spendthrift years.
They have frightened other countries into recognizing the realities of the modern world. The US is a heavily indebted place and a poor credit risk to boot. The US has traditionally been relatively insulated from world markets. Not least with oil, that is no longer the case, and China's role as the workshop and assembly plant of the US has indeed produced understandable tensions between the currencies. While China's initial adjustment to the RMB is really minimal and a face-saving gesture for Bush, it promises much more. And in the package, the words "rebalancing holdings," came to the ears of the currency markets.
From Russia, Japan, Taiwan, Hong Kong and Korea, governments will increasingly want their trade surpluses to be held in euros, yen, or even sterling, rather than dollars whose value can only be eroded further by the process. When the Koreans recently mentioned it, the dollar immediately caught a cold. The Chinese could cause pneumonia.
Currencies are strange things. People inside countries can live for some time with money that is weak in relation to others. The plunging dollar has had little effect on the lifestyles of Americans so far, unless they travel abroad to somewhere like Europe, and unless they are using oil, which although luckily priced in dollars, is also traded beyond the dollar zone, and so, like gold, is rising in dollar terms.
While the RMB was pegged to the dollar, Chinese manufactured goods could arrive at the Wal-Marts and Kmarts of rustbelt America cheaper than ever before. For all sorts of reasons, manufactured goods for US consumers cost much less now than they did a decade or so ago both in relative and absolute terms.
But reality has to intrude. As the US never tires of telling the rest of the world when it is expedient to do so, that the market will win out in the end.
By any standards, the RMB was too low, held there by government decree, and the greenback has benefited from the possibly dubious advantages of being the reserve currency for much of the world since sterling sensibly retired 40 years ago.
At some point, the dollar will go down, much more, and the RMB will go up much more. But it demands finesse and skill to ensure the mutual soft landing that both parties need and that the world wants. It is counter-intuitive and in the long run unsustainable that a country like China with an average GDP per person a fraction that of the United States should be investing in rebuilding the American economy. At some point those RMB should be invested in China, raising local consumption and living standards.
Both the US and China have shifted from relatively autarkic self-contained economies to much more trade-based versions. China's position as a trading nation is in fact much more influential than the absolute size of its economy would suggest.
But China and the US are bound economically far more than they are politically. General Zhu Chenghu, China's answer to John Bolton, may have blustered about the nuclear option, but he was promptly disowned by Beijing, while the persistent desire of Congress in Washington to have its deficit and beat upon its creditors is bound to eventually exhaust the patience of China.
But in the near future, it is in no one's interest to see a crash landing since each economy would pull down the other-as well as do huge damage to the rest of the world. A soft landing has to be a concerted effort to woo Chinese investors into the US, to replace the money that the American consumers are no longer making. A congressional vow of silence would probably be in order.
Ian Williams is a New York-based journalist writing on politics and economics.
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