Obama's Potential Chinese Death Trap

Jeremy Warner Daily Telegraph March 30, 2010

Accessibility links

Tuesday 30 March 2010 | Global Business feed

Advertisement Website of the Telegraph Media Group with breaking news, sport, business, latest UK and world news. Content from the Daily Telegraph and Sunday Telegraph newspapers and video from Telegraph TV. Enhanced by Google Home News Sport Finance Lifestyle Comment Travel Culture Technology Fashion Jobs Dating Games Offers Budget 2010 News by Sector Comment Personal Finance Markets Economics Business Club Blogs Finance Video Fund Game Home Finance Global Business Barack Obama faces potential Chinese death trap Newly emboldened by his successes with health care reform and nuclear disarmament, what next for Super-Obama?

By Jeremy Warner, Assistant Editor Published: 6:30AM BST 30 Mar 2010

President Obama at Andrews Air Force base this week

From energy policy to climate change and from infrastructure renewal to Iran and the Middle East, the list of challenges is almost endless. But the three most pressing concern matters economic – trade relations with China, financial reform and deficit reduction.

The road ahead on all three is filled with pitfalls. If the US President gets any of them wrong, his supposed triumph on healthcare will soon be the forgotten flotsam and jetsam of another failed presidency.

Related Articles Paul Krugman, the Nobel prize winner who threatens the world Is China's Politburo spoiling for a showdown with America? China orders retreat from risky dollar assets

The least contentious – financial reform – first. I say least contentious for two reasons. One is that after the worst banking crisis since the Great Depression, virtually everyone outside the banking community itself, and if the truth be known quite a few within it, accepts the need for root and branch reform. There is also already a bill passed by the Senate Committee that the Administration substantially goes along with.

The other is that America can broadly do what it likes with financial reform without fear of the consequences for its financial markets. Unlike Britain and some others, it doesn't have to wait for international consensus or be compromised by it. No bank with international pretensions can afford not to be in the US, so whatever the US does, banks will be forced to buckle under and go along with it. The wrong approach applied unilaterally to the City, on the other hand, would risk a mass exodus of international finance.

The upshot is that financial reform in the US ought to be relatively easy. With much vital detail yet to be thrashed out, this is unfortunately proving far from the case. Broadly speaking, America seems to go along with the reform agenda set out by the G20, though signs of real engagement are still absent.

The US Treasury Secretary, Tim Geithner, nevertheless promises to be bound by the Basel Committee's new rules on capital and liquidity, and he seems too to be in favour of the idea of a universal banking levy, internationally determined but nationally applied.

Even so, much of the substance in the US reform agenda is fast running into the sand. The Volcker rule, a bold attempt to bring back some of the banking legislation of the Great Depression by banning banks from engaging in riskier, proprietary trading activities, appears already to have died a death over problems of definition. There is also plenty of disagreement around the regulation of derivatives and the proposed requirement on banks to hold "skin in the game" on securisations.

Once the powerful and exceptionally well resourced banking lobby has got its teeth into these and other issues, you wonder how much of the announced blue print for reform will remain.

With the financial crisis now largely over and the economy recovering, bankers are quite convincingly able to argue that beyond tighter capital and liquidity controls, not much more needs to be done. To go further might crimp credit provision and undermine the recovery.

The Obama administration doesn't accept this argument; public anger with the banks in the US is if anything even greater than it is here in the UK. The President needs to answer this fury before the mid-term elections with a coherent set of measures that credibly reduce the risk of another banking crisis.

By Jeremy Warner, Assistant Editor Published: 6:30AM BST 30 Mar 2010

Once the powerful and exceptionally well resourced banking lobby has got its teeth into these and other issues, you wonder how much of the announced blue print for reform will remain.

His difficulty is that he may already have used up all his political credit getting the compromised healthcare plan through. The same may also be true of the Administration's plans for deficit reduction, such as they are. Announced tax rises and spending cuts already face formidable opposition. It scarcely needs saying that as presently drafted, they don't in any case go far enough. Even the UK Government's plans for fiscal consolidation, vague as they are, look detailed, precise and comprehensive by comparison.

In international relations, let's for the moment forget the distractions of the Middle East and Iran's nuclear ambitions. The country that really matters to the US and will define the geo-political landscape of the future is China, America's biggest trading partner. Against this, the Middle East is an irrelevance.

Up until recently, the general assumption was that the two military superpowers needed each other too much to allow for any serious deterioration in relations. The economic crisis has tested that assumption. We have to hope that sense will prevail, and the two will find ways of sorting out their differences without retreat into a disastrous trade war, but the political rhetoric and posturing grows more worrying by the day.

If only Washington could take the politics out of the dialogue, then a deal would be within its reach for a phased revaluation of the yuan, possibly beginning with a one off 5 per cent appreciation followed by the reintroduction of the crawling peg, allowing for revaluations of a further 5 per cent a year thereafter.

It is ever more apparent that it would be in China's domestic interests to allow an upward adjustment in the currency. By reducing the cost of imports, it would take the pressure off inflation and also in time help to reduce the country's dependence on exports for growth. Yet China won't do it under threat of trade retaliation while for many in America, small annual adjustments in the currency are not good enough. I'm not suggesting China must always be humoured and appeased in the hope it eventually comes around to Western ways of thinking.

Rio Tinto's decision on Monday to abandon its employees to their fate in Beijing over charges of bribery and theft is yet another example of the way Western interests seem always and disgracefully when dealing with China to subjugate human rights to supposed commercial interest.

But at the same time, it's ever clearer where future economic power is going to gravitate. The fire sale of Volvo by the overly indebted Ford to cash rich Chinese interests says it all. China may already have overtaken Japan as the world's second largest economy, and assuming its state sponsored capitalist model continues to perform as now, it will soon be chasing America for the number one slot.

There is no point in trying to halt or reverse this trend. Instead the challenge for President Obama and his successors is to work with China for mutual advantage, as the two countries have succeeded in doing for many years now. I fear for the consequences if the hawkish approach demanded by many in the US is applied. As I say, healthcare reform would look but a transitory triumph if the world sinks back into the inter-regional conflicts of the past.