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[Music]
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China and Western countries have been
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squabbling over exchange rates for years
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the United States and many other
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countries accuse China of buying dollars
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to keep China's currency weaker than it
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would be otherwise that makes China's
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Goods cheaper in other countries it
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makes it more expensive for the Chinese
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to buy from foreigners in the United
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States politicians and Regulators say
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China's policies undermine exports
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costing American jobs knowledge at
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Wharton has invited Professor Maro
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Gillan to explain what's at stake and
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why this conflict is so hard to
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resolve is it true that China's currency
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policy is costing American jobs well it
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is true uh but at the same time is not
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accurate it is true in so far as as uh
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you know um it is harder for American
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companies uh to sell in China if uh uh
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domestic consumption in China doesn't
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take off and one of the reasons why it's
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not taking off is because the uh their
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currency is undervalued Right
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artificially um but uh the other thing
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that one um must keep in mind is that uh
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the Chinese uh weakness uh in terms of
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uh their currency is also affecting uh
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the competitiveness of US exports in
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other markets like in Japan I was
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stunned to read the other day an article
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a very well done article uh in an
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economics Journal showing that the
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overlap between American uh exports to
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Japan and Chinese exports to Japan is
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exactly
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87% uh which is astonishing that means
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that uh uh Chinese producers and
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American Producers are actually
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competing with each other in third
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Market such as for example Japan um so I
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think it is true now by the same token
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it is not true because uh you see
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countries really can both benefit from
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global economic exchange so China and
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the United States don't really compete
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against each other American companies
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and Chinese companies compete right
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companies compete countries can actually
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both win so I think uh the uh the way to
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frame the debate right now should be how
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can both China and the US benefit from
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the global economy one of the there's
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been so much uh sort of hue and cry over
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this
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that I'm curious whether uh the
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countries that are criticizing China uh
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to what extent they have a legitimate
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complaint and to what extent it's just
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convenient to point the finger at China
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and tell your people that it's China
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that's causing this problem you're
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absolutely correct it is convenient uh
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you know to ask somebody else to revalue
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their currency because that
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automatically you know within uh you
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know 24 hours essentially makes your own
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products and services more competitive
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uh in in the uh in the global economy so
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it is convenient from that point of view
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now having said that uh you know
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unfortunately the Chinese currency is
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not traded in the markets so we don't
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know for sure what its value should be
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but I think there is wide agreement that
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its value should be higher than uh what
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it is right now but let me also add that
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what is really complicated matters is
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that there's a lot of uncertainty as to
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what the relationship will be between
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the dollar and the Euro um because you
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know there are large deficits here in
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the United States uh there are problems
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political problems in Europe uh you know
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it is um still a question mark whether
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European countries uh that are members
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in the Euros system are going to be able
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to uh uh uh you know continue having a
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common currency or not so I can also
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understand the Chinese the Chinese don't
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want to make a move when there is so
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much uncertainty as to the relationship
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between the other two important
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currencies in the world um because they
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could uh you know make a mistake right
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if they choose to revalue let's say by a
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certain amount relative to the dollar
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but that also will change the way in
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which China relates to the euro zone
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right so given that there's much so much
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uncertainty right now I think it is the
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wrong moment uh from the Chinese point
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of view to engage in a realignment so
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that sounds a little like the classic
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chicken and egg problem and and what do
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you think it'll take to break through
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that and get some resolution that
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everybody can live with well one option
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is to try to uh organize once again the
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um coordinated action that took place
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back in 1985 with a plaza Accord at the
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time if you remember the G7 China was
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not a player because China actually was
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not a very important economic power at
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the time uh the G7 though got together
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and they decided to intervene in the
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markets so that the dollar value the
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value of the dollar would slide very
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very slowly right and uh and it did drop
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in value by 30 by 40% within uh you know
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18 months and that was needed because
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the US was again running big deficits
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and had a problem with competitiveness
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and that really uh you know helped um um
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Everybody overcome the U many problems
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that were besetting the global economy
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back then so today what I think is the
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best case scenario is that uh not the G7
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but we need the G7 plus China perhaps
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also India and Russia right but but
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especially China they need to come
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together and uh they need to come up
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with some coordinated action and right
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now I think uh you know the four main
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players um because those are the four
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big currencies in the world are uh so
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the US with the dollar the Chinese with
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a Remnant B uh the Japanese with a Yen
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and the Europeans with a Euro and what
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is the Chinese incentive to accommodate
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the rest of the world on this well in
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the short run uh they really don't have
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an incentive because the Chinese
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government needs the economy to keep on
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growing and the Chinese economy grows
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because of exports so they have a very
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strong disincentive to uh you know
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revalue their currency because that
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would hurt their exports uh medium run
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right so let's say three to five years
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or long run 10 15 years it is in the
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best interest of the Chinese to actually
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do this why because China is getting
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richer and as China gets richer uh you
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would U expect which is what happened
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with other countries that exports would
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uh decline as an engine right for
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economic growth and the domestic Market
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would start you know being more
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important just as as as has happened in
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the United States as happened in Germany
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you know way back that's the development
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of a consumer more consumer driv but in
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China's case there's another
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complication which is that not all the
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Chinese population is enjoying the
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fruits of economic growth so you have
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300 million people who are now middle
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class or and some of them are really
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rich right but then you have another 600
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or 700 million in rural areas who are
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still living in poverty uh so the
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Chinese uh approach to the problem is
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complex uh out of necessity because they
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are facing a very complicated issue and
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for them timing is very important that's
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why I'm saying that in the short run
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maybe you know next week or in two weeks
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from now it doesn't make that much sense
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for the Chinese to give in to the
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pressure uh let's say three years from
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now five years from now 10 years from
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now China of course has to develop its
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domestic market and has to you know uh
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move in the direction that the Americans
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and the Europeans are now asking China
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to move now instead of the uh G7 we're
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often talking about the G20 these days
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and their meeting in November do you
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expect any kind of breakthrough there or
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progress of any kind uh well uh I hope
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so uh but I'm pessimistic I think the
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G20 is uh you know the the the very name
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of the uh of the group indicates it is
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just too large it's very difficult to
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make 20 uh parties agree to anything the
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G7 was already very large just imagine
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the G20 and again as I mentioned earlier
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I think the key players here are the
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United States China Japan and the Euro
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zone right uh and as long as those four
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can come to some kind of an agreement uh
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then I think we will be in good shape
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but that agreement has not uh uh you
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know become a reality yet now are are
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the Euro Zone and the US and Japan are
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they of one mind on this or are there
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divisions there as well no there are
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divisions and I think uh what happened
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last week with Japan's intervention to
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uh you know try to uh uh slow down the
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appreciation of the Yen uh demonstrates
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that in the absence of some kind of a
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four-way agreement okay then each of
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these uh countries us China Japan and
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the
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European monetary Union will try to go
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its own way and defend its own interests
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and of course that can be detrimental uh
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to global economic growth uh remember
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that uh the problem with the present
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situation is that we're coming out of a
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crisis right uh and the imbalances that
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led to the crisis in the first place
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with big deficits in some parts of the
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world and big surpluses in other parts
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of the world have not been addressed
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right so we continue to have this
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structural problem and uh you know
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politically it's going to be hard uh
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because once again nobody wants to uh at
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least until now uh wants to give up
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something right in exchange for an
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agreement um because there's so much
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uncertainty as to you know uh when the
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global economy will start growing again
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in a robust way uh we have the US and
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Europe um you know with high
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Unemployment uh the political Stakes are
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very high this is part of the problem
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now is this situation slowing the
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world's recovery from the last I think
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it is I think it is and it is also um
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you know I think it is fair to say that
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it is also uh keeping the probability of
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yet another problem farther down the
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road relatively high so we need to
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address these imbalances in the global
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economy uh we need to uh find a way for
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the Chinese to feel more at ease with
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their new role in global economic
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Affairs and that we certainly need to
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help them make the transition from being
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a poor developing
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country uh and becoming one you know one
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of the leading economies in in the world
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uh with a viverant domestic Market based
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on middle class consumption so uh to
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summarize you uh are not optimistic
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there's going to be any immediate
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breakthrough but down the road it'll be
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in the Chinese interests uh to
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accommodate other count I just uh don't
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think that right now given the
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uncertainty in the markets uh that is
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going to be easy for these four you know
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big uh economies in the world to come to
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an agreement um but I you know I tend to
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think that uh in 3 years from now it
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will be easier but I'm uh you know I
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stand ready to uh to be surprised by our
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political leaders well we'll all be
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keeping a close eye on it thank you very
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much thank you for having me
