Tuesday, November 30, 2010

Why US can't churn out a rerun of Plaza Accord

Business Times - 01 Dec 2010



Business Times - 01 Dec 2010


Why US can't churn out a rerun of Plaza Accord

Unlike in 1985, the perception now is that the US is driven by its own economic self-interest

By LEON HADAR
WASHINGTON CORRESPONDENT

AT A time when the need to fix the global financial imbalances between the United States and China dominates the policy agenda, veteran diplomats and economic officials are recalling with nostalgia a similar effort to settle the economic tensions between the US and Japan in the 1980s.

Then, as now, Washington was preoccupied with mounting budget and trade deficits, and many US officials and lawmakers were worried over competition from a rising East Asian economic power - Japan - which they accused of pursuing mercantilist trade policies.

The conventional wisdom then, as now, was that reducing the US deficits and bringing savings and investment more into balance globally would require the devaluation of the US dollar against the Japanese yen.

That in turn would help reduce the price of US exports and increase that of imports. Export growth would be fostered and the trade deficit would shrink.

To make a long story short, then-US trade secretary James Baker invited his counterparts from Japan, West Germany, France and the UK to the Plaza Hotel in New York where, on Sept 22, 1995, they agreed to engineer a global devaluation of the US dollar against the Japanese yen (and the German mark).

Hence, the current daydreams in Washington about a Plaza Accord II involving the G-20 governments, under which China will agree to revalue the yuan against the US dollar (and other currencies).

Now, as then, such a plan is framed not only as part of an effort to increase US exports but also as an element in a global strategy to bring savings and investment more into balance.

But as Clyde Prestowitz, a former US trade negotiator in Asia and the founder of the Washington-based Economic Strategy Institute, points out in his new book, The Betrayal of American Prosperity (New York: Free Press), the 1985 currency accord had mixed results.

The US dollar declined by more than 50 per cent against the yen (and less against the mark) and a new round of global trade liberalisation talks was launched.

However, while the US trade deficit with Western Europe did fall, the deficit with Japan actually grew since, as Mr Prestowitz notes, Tokyo ended up offsetting some of the deal's impact on its exports by reducing interest rates, 'thereby lowering the costs of investment and borrowing and increasing the competitiveness of Japanese exporters' as well as helping ignite a real-estate and stock-market bubble.

More significantly, there is a major systemic reason why the US could do a Plaza Accord in 1985 - and cannot produce a rerun of that exercise in global economic management 25 years later.

Then, the US was a military and economic hegemon leading the powerful Western alliance that included Japan, Germany and the other large industrialised nations. After the end of World War II, the US had established and dominated an international regime involving the provision of security (through Nato and security alliances with Japan) and the maintenance of a relatively open financial and trade system (through the World Bank, the International Monetary Fund and the General Agreement on Tariffs and Trade) as well as the advancement of a set of agreed-upon rules and norms that reflected democratic and liberal values.

In that context, in exchange for maintaining its hegemonic role - demonstrated by its wide military presence worldwide and the privileged position of the US dollar - Washington was willing to pay the high cost of protecting that US-led international regime by, among other things, allowing its allies a free ride on its security protection and by promoting their economic growth through flow of exports to the open US market.

If anything, the signing of the Plaza Accord demonstrated that notwithstanding growing Japanese (and German) economic power relative to that of the US, Washington continued to maintain its international leadership position.

At the end of the day, the perception in Washington was that, regardless of the costs it incurred, supporting an open world financial and trade system helped maintain US strategic and economic power. At the same time, US nuclear umbrella and its role as an importer of last resort - not to mention its position as the liberal democratic superpower - made it more likely than not that America's allies would follow its policy prescriptions on critical issues.

Not any more. While the so-called Bretton Woods Institutions (the World Bank and the IMF) remain in place as do Nato and the security accord with Japan (and South Korea), they seem to operate mostly through inertia and by default than in response to pressure from US economic and military power.

Unlike in 1985 when securing the interests of the international system seemed to match that of the US and vice versa, the current perception in China (and even among traditional allies such as Germany) is that the Americans are driven mainly by their own economic self-interest. Thus, pursuing American policy prescriptions would run contrary to their own interests.

Hence, it is not surprising that this sort of response abroad is triggering growing opposition among Americans to paying the economic and military costs of continuing to serve in the role of the hegemon - global military overstretch, expanding deficits, lower standards of living.

More Americans are concluding that maintaining that role is becoming less and less cost-effective, if not unrealistic (they notice the US inability to halt North Korean military aggression). The sentiment is not unlike that expressed by many Germans who are tired of paying the costs of maintaining their leadership position in the European Union.

Indeed, the hegemon is exhausted.


Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.


Unlike in 1985, the perception now is that the US is driven by its own economic self-interest

By LEON HADAR
WASHINGTON CORRESPONDENT

AT A time when the need to fix the global financial imbalances between the United States and China dominates the policy agenda, veteran diplomats and economic officials are recalling with nostalgia a similar effort to settle the economic tensions between the US and Japan in the 1980s.

Then, as now, Washington was preoccupied with mounting budget and trade deficits, and many US officials and lawmakers were worried over competition from a rising East Asian economic power - Japan - which they accused of pursuing mercantilist trade policies.

The conventional wisdom then, as now, was that reducing the US deficits and bringing savings and investment more into balance globally would require the devaluation of the US dollar against the Japanese yen.

That in turn would help reduce the price of US exports and increase that of imports. Export growth would be fostered and the trade deficit would shrink.

To make a long story short, then-US trade secretary James Baker invited his counterparts from Japan, West Germany, France and the UK to the Plaza Hotel in New York where, on Sept 22, 1995, they agreed to engineer a global devaluation of the US dollar against the Japanese yen (and the German mark).

Hence, the current daydreams in Washington about a Plaza Accord II involving the G-20 governments, under which China will agree to revalue the yuan against the US dollar (and other currencies).

Now, as then, such a plan is framed not only as part of an effort to increase US exports but also as an element in a global strategy to bring savings and investment more into balance.

But as Clyde Prestowitz, a former US trade negotiator in Asia and the founder of the Washington-based Economic Strategy Institute, points out in his new book, The Betrayal of American Prosperity (New York: Free Press), the 1985 currency accord had mixed results.

The US dollar declined by more than 50 per cent against the yen (and less against the mark) and a new round of global trade liberalisation talks was launched.

However, while the US trade deficit with Western Europe did fall, the deficit with Japan actually grew since, as Mr Prestowitz notes, Tokyo ended up offsetting some of the deal's impact on its exports by reducing interest rates, 'thereby lowering the costs of investment and borrowing and increasing the competitiveness of Japanese exporters' as well as helping ignite a real-estate and stock-market bubble.

More significantly, there is a major systemic reason why the US could do a Plaza Accord in 1985 - and cannot produce a rerun of that exercise in global economic management 25 years later.

Then, the US was a military and economic hegemon leading the powerful Western alliance that included Japan, Germany and the other large industrialised nations. After the end of World War II, the US had established and dominated an international regime involving the provision of security (through Nato and security alliances with Japan) and the maintenance of a relatively open financial and trade system (through the World Bank, the International Monetary Fund and the General Agreement on Tariffs and Trade) as well as the advancement of a set of agreed-upon rules and norms that reflected democratic and liberal values.

In that context, in exchange for maintaining its hegemonic role - demonstrated by its wide military presence worldwide and the privileged position of the US dollar - Washington was willing to pay the high cost of protecting that US-led international regime by, among other things, allowing its allies a free ride on its security protection and by promoting their economic growth through flow of exports to the open US market.

If anything, the signing of the Plaza Accord demonstrated that notwithstanding growing Japanese (and German) economic power relative to that of the US, Washington continued to maintain its international leadership position.

At the end of the day, the perception in Washington was that, regardless of the costs it incurred, supporting an open world financial and trade system helped maintain US strategic and economic power. At the same time, US nuclear umbrella and its role as an importer of last resort - not to mention its position as the liberal democratic superpower - made it more likely than not that America's allies would follow its policy prescriptions on critical issues.

Not any more. While the so-called Bretton Woods Institutions (the World Bank and the IMF) remain in place as do Nato and the security accord with Japan (and South Korea), they seem to operate mostly through inertia and by default than in response to pressure from US economic and military power.

Unlike in 1985 when securing the interests of the international system seemed to match that of the US and vice versa, the current perception in China (and even among traditional allies such as Germany) is that the Americans are driven mainly by their own economic self-interest. Thus, pursuing American policy prescriptions would run contrary to their own interests.

Hence, it is not surprising that this sort of response abroad is triggering growing opposition among Americans to paying the economic and military costs of continuing to serve in the role of the hegemon - global military overstretch, expanding deficits, lower standards of living.

More Americans are concluding that maintaining that role is becoming less and less cost-effective, if not unrealistic (they notice the US inability to halt North Korean military aggression). The sentiment is not unlike that expressed by many Germans who are tired of paying the costs of maintaining their leadership position in the European Union.

Indeed, the hegemon is exhausted.


Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.

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