Showdown with "Chermany"

Where will the jobs come from? President Obama wants to double America’s exports over five years to help generate good jobs. With Recovery Act spending coming to an end, states and localities laying off employees, banks still not making loans, and consumers reeling from unemployment, stagnant wages, and losses in home values and retirement plans, increasing exports is one ray of hope to generate jobs. And the U.S. can’t go back to the old economy where trade deficits reached 6 percent of gross domestic product, and we were borrowing over $2 billion a day from abroad to pay for goods made elsewhere.

But if the U.S. is to sell more abroad and borrow less, countries with trade surpluses – notably Germany and China – will have to spend more, buy more, save less and export less. The G-20 governments, representing the leading economies in the world, agreed that is the only way to have the reductions essential to a secure recovery in the dangerous and unsustainable imbalances in the global system.

Only China and Germany clearly haven’t gotten the message. The Chinese continue unprecedented measures to manipulate their currency, now starkly undervalued against the dollar. This is a centerpiece of a comprehensive mercantilist policy of growth by dominating export markets. Germany, the world’s second greatest surplus country, continues to restrain demand at home, while subsidizing its high-end export engines.

Both countries reject any change of course. China’s Premier Wen Jiabao scorned U.S. pressure on the Chinese to revalue its currency, summoning up the wondrous gall to accuse the U.S. and other countries of “protectionism” for seeking to depreciate their currencies. Germany’s government similarly has spurned calls led by the French to increase demand domestically to help fuel European recovery.

Martin Wolf in Tuesday's Financial Times coins the neologism "Chermany" to describe these trading giants and highlights the absurdity of their position. The Germans are insisting that its trading partners in Europe—dramatized by the Greeks but truly represented by the French with deficits at about 9 percent of GDP—embrace austerity to reduce their deficits rapidly. But if Europe is to avoid a deep recession and is to play its part in a global recovery, then Germany will have to buy more from its partners. It will have to kick up domestic demand and save less. By rejecting this course, the Germans could well push Europe back into recession.

Similarly, the Chinese demand that the U.S. bolster the dollar by rolling back deficits and raising interest rates. And they want to sustain their export markets in the U.S. But the only result of that would be crippling high unemployment here, and the export of a global recession. This isn’t an acceptable outcome.

The resulting showdown will escalate rapidly given the continuing crisis. In Europe, Wolf suggests that Germany’s intransigence could either to a sustained European recession or a rift that may break up the Eurozone itself.

In the U.S., the rumble with China is heating up. On April 15, the Treasury Department has to decide whether it will formally acknowledge reality and designate China as a currency manipulator. On Monday, 130 legislators of both parties wrote Treasury Secretary Timothy Geithner a letter demanding that he do just that. On Tuesday, a bipartisan group of senators, led by Sens. Chuck Schumer, D-N.Y., and Lindsey Graham, R-S.C., introduced legislation to force Treasury’s hand, and to map the way towards imposing retaliatory trade barriers on Chinese goods.

The Chinese, meanwhile, are openly recruiting U.S. companies with subsidiaries in China to lobby against any U.S. action. The China lobby—think tanks, multinational companies and banks—will unleash a howl about U.S. protectionism, warn of trade wars, discount the importance of Chinese mercantilism, and remind us of the benefits of a cheap yuan. Chinese threats to dump dollars from their $2.4 trillion cache will rattle financial markets—even though a declining dollar will cost the Chinese big time. (See Dave Johnson's post.)

But in the U.S., the corporate “free trade” consensus is cracking apart. Mike Elk describes the growing calls for action on China from across the political spectrum.

Free-trade zealots like Washington Post columnist Robert J. Samuelson now argues we can’t “sit passively while Chinese trade and currency policies jeopardize jobs here.” Today, The New York Times editorializes in support of action.

This could easily get out of hand, but the showdown with Chermany can’t be avoided. We can’t go back to a world in which the U.S. is the consumer of last resort, borrowing $2 billion a day to buy goods from abroad. Europe can’t grow if Germany enforces austerity on the rest of the continent, while sustaining an economy based on massive trade surpluses. If global demand is to be sustained, and the destabilizing imbalances that helped bring down the old economy countered, Chermany will have to change course, as will deficit countries.

Rebalancing is best done cooperatively, but it must be done. And it can no longer be delayed.

Views expressed on this page are those of the authors and not necessarily those of Campaign for America's Future or Institute for America's Future