Currency war: How quickly "war" can escalate. First China, then Japan, then the United States, then Brazil: we are all at currency war, say some policymakers. Except that we are not. Dollar weakness reflects the unlovely promise of more quantitative easing. Japan's "competitive devaluation" leaves the yen close to 15-year dollar highs. At present there is only one big currency manipulator in the world, and that is China. And as Tim Geithner, the US Treasury Secretary, hints today, China must budge on policy soon. If it does not, competitive devaluations and trade wars really will break out, harming everyone.
At present the talk of currency war overstates the case. But tensions are building dangerously. The reason is that China has pursued a mercantilist policy without any regard for what the west, its Asian neighbours or other emerging economies think. And, perhaps strangely, the world has allowed China to get away with that. Geithner is right. The world does not have an "effective multilateral mechanism" to encourage export-oriented countries with undervalued currencies to play ball.
Geithner may believe such an institution should be created. There has also been talk recently of a new Plaza Accord that would imitate the 1985 agreement between leading economies to promote a weaker dollar and stronger Japanese yen and German deutschemark. But the need is for action now. And the world already has talking shops. G20 finance ministers will meet this coming weekend. The opportunity is there for many countries, developed and developing, to apply pressure on China.
A reasonable demand is that China should allow the yuan, fixed for two years until this summer, to rise more rapidly. An annual appreciation in the currency against the dollar of 10 per cent would begin to diminish the huge competitive advantage China has gained in recent years. An appreciation at this pace would also give time for Chinese industry to adapt.
What the world must remember is that rapid Chinese growth is a huge advantage to a struggling global economy. But China, too, must rebalance its economy and cannot continue to enjoy an unfair exchange-rate advantage. Protectionist moves may be closer than China realises. The country's leaders need to cooperate now.