Commentary: What does a sensible trade agreement between the United States and China look like? Full of compromise

CAMBRIDGE: Will an imminent trade deal between the United States and China exacerbate global economic cycles or even sow the seeds of the next Asian financial crisis?

If the eventual agreement – assuming there is one – forces China to indefinitely adopt its outdated and rigid exchange rate regime, the answer may be positive.

A STABLE EXCHANGE RATE IS NOT VIABLE

In order for the yuan exchange rate to remain stable against the US dollar, the Chinese authorities would have to adjust US interest rate movements or contend with capital controls to try to ease the pressure on interest rates. currency exchange.

But China is simply too big and too global to adhere to a foreign exchange policy better adapted to a small open economy.

Moreover, neither of the two approaches to keeping the yuan stable – to maintain interest rate parity or to control capital – makes sense for an economy whose economic cycles seldom coincide with those of the United States.

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With its downward economic trend, its oversized construction sector and its over-indebted regional governments, China will inevitably face politically sensitive growth issues.

In this case, the People's Bank of China will have to be able to ease the monetary conditions without worrying about the support of the exchange rate.

A cost for other purposes

When a country is under severe financial and macroeconomic pressure, maintaining an unyielding exchange rate is a well-known recipe for disaster. The International Monetary Fund, along with most academic economists, has been pushing this point for a very long time.

Such an exchange agreement between the United States and China would contradict other elements of a possible bilateral trade agreement, many of which are "win-win". For example, China is committed to enforcing intellectual property rights with much more vigor, although the strength remains to be seen.

Greater Chinese rigor in this area could benefit US and European firms in the short term, but in the long run, it will help fuel competition and innovation in China's manufacturing and technology sectors.

After all, in the nineteenth century, the United States, like today's China, had little interest in protecting the intellectual property rights of foreign (mostly British) firms in the United States. era), and the Americans largely copied their ideas and plans.

However, as American innovators became increasingly successful, they too needed the protection of their rights. The United States subsequently put its patent and intellectual property laws at the forefront of global standards.

REDUCE SUBSIDIES ON EXPORTERS

The United States would insist that the Chinese government refrain from paying excessive subsidies to exporters. Most of these subsidies go to inefficient Chinese state-owned enterprises, thus depriving credit and other resources of the private sector more dynamically.

More generally, a trade agreement may well give a new impetus to China's economic reforms, which seem to have stalled or reversed in recent years.

During a recent trip to Beijing to attend the Development Forum in China, I interviewed a senior Chinese official about this slowdown. I was expecting him to launch a long list of reforms without consequences, in line with the usual line that China is doing things very gradually all the time.

I was therefore surprised when he frankly admitted that "we are only making major economic reforms when there is a crisis and that the crisis has not been enough." important lately.

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HANDLING NO MONEY

In this sense, US President Donald Trump seems to be exactly what the doctor ordered, as he forced the Chinese authorities to recognize that they can no longer rely on the demand of US consumers to maintain the growth of the Chinese locomotive.

In fact, some observers jokingly say that Trump is the savior of the Chinese economy, as the panic provoked by a possible trade war helps to catalyze long-stalled structural reforms.

But US pressure on China to commit to a more stable dollar-yuan exchange rate and avoid a competitive devaluation of its currency could jeopardize further economic reforms.

In particular, such a regime would prevent China from gradually adopting the increased exchange rate flexibility required for a more independent monetary policy.

Trump's team seems to have the misguided impression that China has intervened to maintain its weak currency in order to promote exports. The view that China manipulates its currency, long exaggerated by some commentators, understates the fact that the reason for China's hyper-competitiveness has long been in its relatively low wages.

More fundamentally, the accusation that China handles the exchange rate is completely disconnected from recent history. In recent years, the pressures on the yuan have been largely down and the government has responded with much stricter restrictions on capital outflows that both under and on the table.

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Far from capping the exchange rate of the yuan, the Chinese authorities have put a floor, partly for fear of too rapid depreciation leading to a massive capital outflow.

LOW ADDRESS IN ACCOUNTING

An inflexible exchange rate may not be the only potential weakness of a potential trade deal between the United States and China. Neither did US negotiators seem to appreciate the accounting rule that a country's current account (a broad measure of its trade balance) is always equal to national savings minus domestic investment.

If the growth of US consumption is strong and the US government has a huge budget deficit, the country has to borrow somewhere. And if China is forced to reduce its bilateral trade surplus with the United States, it will simply relinquish the final stages of the production of goods, so that imports from the United States will come from another Asian country. , such as Vietnam.

Certainly, it is important for the world to push China to conform to the conventional practices of world trade. Chinese President Xi Jinping's recent speeches are encouraging in this regard (although it is hoped that the trade negotiations will deal with environmental protection).

But if a final agreement prevents China from gaining greater autonomy in monetary policy, it could create major problems when the next great Asian recession occurs. In this case, US negotiators will have demonstrated their bargaining power, but not their wisdom.

Kenneth Rogoff, former chief economist of the IMF, is professor of economics and public policy at Harvard University.