When affluence works against itself

The recent move by the US Federal Reserve to weaken the dollar notwirhstanding, I continue to be surprised by the use of the phrase “currency war” to describe the ongoing row between the USA and China over exchange rate adjustments. The phrase used to mean  competitive changes enforced  by two countries in the external value of their respective currencies so that each could capture the other’s market. I guess language is more flexible than the renminbi as “currency war” is now being freely used in a quite different context. There is no competition about selling in a third market. All the worry is only on one side, with the USA watching with impotent dismay its growing deficit in trade with China.

Maybe the USA should have woken up years ago. But  a country that conducts two wars without raising taxes cannot be expected to have the same worries about the morrow as is expected of lesser mortals. Unconcern spread over two decades has now led to the USA owing China  trillions of dollars. In the admittedly improbable  – but not theoretically impossible, in case of a drastic change in equations – scenario of China deciding to redeem its U.S. bonds at one fell swoop, so to say, as it has every right to,  we shall see a sovereign debt crisis next to which the woes of  Greece and Ireland would be small beer, or thimblefuls of ouzo in the case of the former. So many countries now have a trade surplus with the USA that the consequences of such a catastrophe  are unimaginable, more so as the dollar is the favored reserve currency of most countries. Rebalancing when the rest of the world can no longer rely on the USA to absorb their exports will be extremely difficult. We should also remember that the dollar actually replaced the pound sterling 25 years or more after the U.S. had surpassed the U.K. economically.

The central character on stage for so long cannot become a spectator so easily, but it must learn its lines well, and ad libbing merely confuses the audience. China is certainly not ready to grab the mantle as yet, no matter how rightful and inevitable it may consider its claim to be. All the public posturings, I am sure, are balanced by secret conclaves where mutual interests are recognized and cooperation considered. These will be known only when the archives are thrown open. The USA tells China that a free falling dollar will create a vacuum where China’s steady gains will be sucked in, while China tries to convince the USA that without cheap imports from China, its already bleeding manufacturing sector would never be whole again.  The present situation is certainly not a win-win one but a no-win option is no help. As Larry Summers said recently, “Our wisdom, their wisdom, the way in which we interact is going to be of the utmost importance.”

The irony is that America, in its hubris, dug the hole where it is now slipping. All its fiscal wizards with iconic auras allowed it to practise at home what it does not preach to the rest of the world, often through its chosen handmaidens like the World Bank and the IMF, both of which, however, have been showing some independence in recent times. Poorer countries have been lectured  ad nauseam not to behave like errant adolescents: “Install fiscal discipline”; “Balance your books”; “No deficits, please, you are underdeveloped”; and such. Nobody dared tell the Emperor its fabrics were too transparent, if it wore clothes at all. However, good sense is finally making itself felt, and one hopes the malady is not so far gone that some determined self-discipline, expressed through austere administrative, fiscal and monetary measures cannot cure it. No decline is inevitable but arrogance and inflexibility can make it irreversible.

This is not being well received as ordinary Americans are not distinguished by their introspective acumen. Nor are they able or willing to acknowledge that economic weakness at home translates into political weakness. But they cannot forever shy away from a raw nerve being touched, and will have to confront the twin issues of productivity and freedom of consumer choice. With the extent of capital intensity American industry embodies, output per unit of labour deployed should  outstrip labour productivity in China in all spheres of economic activity. The reason it  often does not is that the wealthiest country in the world has bred a workforce that demands wages which are about the highest in the world.

The disparity in China-US standard wage rates is what neutralizes all the advantages of the latter in labour productivity in particular lines of activity. China produces goods of the same quality at cheaper rates, American consumers exercise the sovereignty of their choice and buy these rather than American products, adding to the merry splurge of the trade deficit. The challenge before American policy makers, in both government and business, is enormous. Wages are not like water, in that they do not go downwards. Paid working hours may be reduced, more outsourcing may be tried, but neither reduction in work-days nor substitution of high-wage domestic labour by shipping out jobs or hiring low-wage workers from poorer countries will solve the problem of trade deficit. As a matter of fact, while outsourcing may help an individual company, it is nationally counterproductive, by depressing the level of domestic employment as also aggravating the difficulties on the balance-of-payments front.

The dilemma is one of fundamental philosophical contours. America is America because it has been the land of unbridled free enterprise and unhindered competition. It has championed unrestricted trade practices and economic liberalization and felt itself vindicated with the emphatic triumph — at least, for the present — of the concept of globalization.

The irony in all this is that it is this globalization that is right now the gest threat to the American economy. Pampered promiscuity is sought to be tuned to ascetic austerity. One understands the disbelief that turns into dislike when President Obama exhorts his fellow citizens that the US education system needs overhauling so that its products can compete successfully with the younger generation emerging from China and India. That is the only way American industry and technology can hope to remain relevant, given the current trends. Emerging markets and developing countries will account for 60% of global GDP. China is moving up the value chain into high-tech capital goods and is poised to account for about a third of global manufacturing of advanced machinery and equipment within a decade, from about 8% today.

The problem for the USA, however, is not merely one of keeping pace with the level of skill or adaptability increasingly seen among, for example, Chinese or Indian workers or technicians. The central marker  is the standard of living of the average American citizen. The Forbes 400  may live the same wherever they are from but the American average is much, much higher than in China or India and gets inflected in American wages, which remain way above those for comparable jobs in the Asian countries. Globalization has broken the back of the trade union movement in India, while it never was strong in China, and the American wage structure, zealously enforced by trade union conglomerates, is the principal obstacle to U.S. competitiveness in the ruthless global market.

Most religions believe the Lord gives and also takes away. The secularly appointed divinity of  free enterprise is not allowed to exercise such authority. American industry is hamstrung because the US is so rich and its workers enjoy such high earnings. Free competition is working to the disadvantage of the US but American labour cannot be persuaded to sacrifice what they have gained from free-market bargaining. It seems paradoxical that just like a revolution is reputed to devour its own children; free enterprise, too, is seen as cutting the branch where it sits. One wonders if there is a lesson for Mongolia somewhere in all this.