Despite the US Treasury Depart-ment's reiteration of a "strong dollar" policy, most people believe this is just a confidence-building measure. The US's current account deficit of US$600 billion -- approximately 6 percent of its GDP -- cannot be allowed to grow indefinitely, and many countries around the world, especially those in East Asia, have already accumulated close to US$2 trillion in foreign currency reserves. As such, US Federal Reserve Chairman Alan Greenspan, when commenting on why the Chinese yuan cannot remain pegged to the US dollar and not appreciate, said that there must be a limit.
Discussion now centers not on the issue of whether the US dollar should depreciate, but rather the degree of its decline to ensure a smooth depreciation as a means to achieve the goal of reducing the US's current account deficit. Or, should another agreement be made similar to the Plaza Accord of 1985 in which the then five major industrial countries (the US, Japan, Germany, the UK and France) jointly moved to cause the US dollar to depreciate? What is the difference between the situation back in 1985 and today?
Also, what would be the economic consequences of a large-scale depreciation of the US dollar, and what kinds of effects would occur as a result of increasingly prominent East Asia regionalism? Several consecutive years of growth in US expenditures (especially in consumption rather than investment) have exceeded an increase in output. On the whole, the situation in other countries has been the reverse.
Seen from the perspective of international finance, the US is purchasing too many products and services for consumption while other countries are buy too many of all sorts of not-so-profitable financial assets issued by the US in preparation for foreign currency exchange.
In other words, there is a trade-off among countries: the US primarily provides the end-point consumer markets, export opportunities and prosperity, while other regions contribute cheap commodities, labor and low-profit or close to no-profit money in return.
The secret of the so-called East Asian economic miracle is in fact based on this kind of mutual international understanding. Apart from the US dollar's unique position as a form of foreign currency reserve, it is this kind of mutual understanding -- or the economic policies that these understandings conceal -- that suppresses the economic reasoning ability of each country's central bank governors. As such, they fail to grasp that buying more and more of a currency that must inevitably depreciate will only delay the moment when that currency will depreciate.
To resolve the US' trade imbalance it is not possible to depend solely on the US (to increase the savings rate). Two external conditions must also apply.
First, economic growth in other regions must be faster than in the US, and the exchange rates of each of the major currencies must be more flexible. Here, of course, I imply a one-way traffic, meaning that different East Asian currencies, as well as the euro (in relation to the fluctuation of the US dollar) and Chinese yuan, must appreciate. Since the euro has appreciated to a new high of US$1.3, and China's trade surplus with the US has soared to billions of dollars every year, there will be even more pressure on the yuan to appreciate.
Several economists have warned that the era of allowing the US dollar to make an orderly depreciation has arrived; delaying it would only make every country in the world spend more on adjustment costs. A more pessimistic view is that unless the US dollar depreciates by at least 40 percent, a looming economic crisis cannot be averted. Supporters of this view are urging major economic entities to once again gather for negotiations similar to the 1985 Plaza Accord -- although many of the beneficial conditions of the Plaza Accord are no longer valid today. For example, at that time the ratio of the US' trade deficit to GDP was only a third of today's, each country's US-dollar holdings were much lower and, as the price of international crude oil was lower, there was no upward pressure on the cost of living in the US.
For East Asia, given the high proportion of end-products exported to the US, any alternation in the dynamic of the US dollar affects economic prospects. As the US must eventually go through a substantial depreciation of its currency to cope with the currency crisis, there are only two ways out: either exchange rates to the US dollar rise, or the price of US products must decline. Either of these options would inevitably have a huge impact on the export industry of the East Asian region.
For East Asia as a whole, due to the continuous decline in the region's dependence on the US market, trade and investment activities within it will become even more intensive and frequent. On the other hand, along with the weakening of the US dollar, savings will flow back. All of these factors will enliven the integration of the increasingly prosperous East Asian region.
Second, if the issue of the US trade imbalance is not resolved properly, US trade policy is very likely to lean toward protectionism. At the least, it may intensify the friction and disputes in its trade relations with other nations. China has sought to vie for an "absolute market position" to avoid the effects of a new kind of protectionism, such as accusations of dumping. Maybe Taiwan, whose strength is built upon its economy, should do something as well, rather than just rushing forward blindly.
Honigmann Hong is an associate research fellow in the international affairs division of the Taiwan Institute of Economic Research.
TRANSLATED BY LIN YA-TI
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