Geithner visits India, here's what China tells him

Dekoff
Shanghai


A brief look at Trade Surpluses and Deficits

INDIA

The indian rupee is one of most undervalued currencies in the world. According to the IMF, the fair value for rupee/usd would be 16:1, but it is trading at 48:1.

This means the Indian currency is 300% undervalued, but yet India has one of the worst current accounts of all major economies. India still has consistent trade deficits with the world. The cheap currency doesn't help India to produce a trade surplus.

CANADA

Since 1971 the Canadian dollar has fluctuated between US$0.66 and US$1.21, moving through that range more than once. In the past 10 years, the Canadian dollar has appreciated about 50% against the US dollar. Yet the US has had consistent trade deficits with Canada for the past 30 years, regardless of the exchange rate.

Canada's economy is largely natural-resource and export-oriented - metals, minerals, lumber, oil and gas, wheat. Canada produces many things the US needs, while the US produces few things that Canada wants.

JAPAN

Since 1960, the Japanese Yen has consistently strengthened against the US dollar, rising from 360:1. In 1985, the year of the Plaza Accord, the Yen was at 240:1. In the 3 years following, the Yen doubled in value to 120:1, and now sits at about 90:1 - and is now 30% or 40% over-valued.

But through all those years, the US consistently had increasing trade deficits with Japan, in spite of the Yen rising more than 300% in value.

Japan, like Canada, produces many things the US needs, but wants little of US production.

CHINA

For many years the RMB was firmly pegged only to the US dollar at about 8.25:1, but was released from that peg in 2005 and has since appreciated about 25%. But the US has persistent trade deficits with China - and these have markedly increased in spite of the recent 25% upward movement of the RMB.

China produces many things Americans want and need, while the US produces less of what China wants.

EUROPE

After the signing of the Plaza Accord in 1984, the major European currencies doubled against the US dollar almost immediately. But the US trade deficits persisted with most of its trading partners.

There are politicians in the US, and even in the White House, who blame China for the recent US subprime financial crisis. In their view, the crisis was caused by the Chinese 'saving too much'.

The US must stop blaming everybody else for their economic problems. The US government insistently claims that their trade deficit and economic problems are caused by China's RMB being undervalued.

In fact the US problems are entirely home-grown. America has serious structural imbalances in its economy, and no amount of messing with the exchange rates of other countries will be a cure.

China is doing all the right things by looking after its own best interests and not derailing or destroying its efforts to modernise and join the first world. It cannot let the US bully it into capitulating.

The RMB was steadily appreciating against the US$ until the meltdown, when it was forced to stop. That is not China's fault. If the US had its own house in order, the world's financial and trade systems would be orderly as well. It really is time to call a spade a spade, and stop letting the US dictate every country's economic policies.