openSecurity

Potential compromise over renminbi may avert US-China trade war

Signs of a compromise in the long-running dispute between the US and China over the renminbi. The followers of Moqtada al Sadr reject both of the leading candidates for the Iraqi premiership. The Israeli Prime Minister pulls out of a US nuclear summit. Kim Jong-il is absent from the annual meeting of the North Korean parliament. All this and more, in today’s security update.
Oliver Scanlan
9 April 2010

On Thursday, the US treasury department announced that Treasury Secretary Timothy Geithner had held talks with Chinese Vice-Premier Wang Qishan in Beijing. No details of the meeting have been released by either side, but it is understood that at least one of the discussion points was the value of the Chinese currency, the renminbi, and its effect on the US trade deficit. The US views the value of the yuan as unfair and the result of Chinese government efforts to keep it artificially low in order to boost Chinese exports.

The discussion comes after literally years of US agitation regarding the renminbi, with concerns having reached fever pitch in the wake of the global financial crisis. In turn, this has led to much speculation over a potential US-China trade war, with the Chinese Commerce Minister, Chen Deming, warning in March that such a war would harm the US more than China.

But there are signs of progress. The US has made conciliatory moves in agreeing to delay the publication of a report into whether China is manipulating its currency until after a series of bilateral and G20 meetings. One of the most important will be a meeting between Presidents Obama and Hu Jintao, scheduled for next week. On the Chinese side, analysts have speculated that concessions may be offered. Although it is unlikely that the yuan would be allowed to float, the Chinese may be persuaded to at least depeg it from the US dollar, and to permit a moderate appreciation in value.

The openSecurity verdict: ‘You don’t solve the trade deficit by hectoring the Chinese over their exchange rates’ was the verdict of former US National Security Adviser Anthony Lake at the time of the 2004 US Presidential election. At the time, he bemoaned the fact that there was no debate between the candidates on the national security implications of being the most indebted country in the world and having China as your largest foreign creditor. This fact underscores the truth in Chen Deming’s assertion that the US would lose a trade war. The economic facts suggest his speculation that the concern over the exchange rates is more to do with forthcoming US mid-term elections than with the trade deficit itself is also valid.

As the chairman of Morgan Stanley Asia pointed out in a recent Financial Times article, the US trade deficit is multilateral; more than ninety countries exported goods to the US of a higher cumulative value than the goods they imported. Thus, Stephen Roach argues, if the value of the yuan does rise against the dollar, the trade deficit would likely to remain the same, all that would happen is that China’s share would be reduced, to the benefit of other nations. Moreover, there would likely be an increase in the prices of consumer goods in the US, which would hit consumer spending, upon which the US recovery and economy in general is based.

Roach cites the structural nature of the US economy as being the reason for the current deficit: the US has extremely low saving rates, which necessitates the import of other countries’ savings to finance its growth. He also mentions off-shoring as being a contributing factor, with China chief among those nations which boast a skilled labour force that will work for a fraction of the cost of labour in the US.

The policy prescription for the US is simply to encourage higher savings rates. In addition, sustained investment in high technology and green industries is required, along with the training and education of American workers that such industries would employ. This will remove any future need to risk a calamitous trade war in a specious attempt to score political points among unemployed and economically insecure US workers ahead of mid-term elections.

Sadrist movement rejects leading candidates for post of prime minister

A referendum held by the Sadrist movement in Iraq has resulted in a rejection of both leading candidates for the post of prime minister, further complicating the task of forming a stable government. The movement have instead voted for former prime minister, Ibrahim al-Jaafari. The movement, led by the Shi’ia cleric Moqtada al Sadr, performed strongly in the election, winning 39 seats in the 325 seat parliament, and could hold the potential balance of power within any future government.

The 7 March election resulted in Iyad Allawi’s Iraqiya party winning the most seats, with incumbent Prime Minister Nouri al Maliki’s State of Law bloc trailing by only two seats. Both men were keen to secure Sadr’s backing. Analysts are pointing to the referendum, nominally open to all Iraqis, as being an adroit, populist move on the part of Moqtada al Sadr that will give him a popular mandate to withhold support from Maliki. 

Netanyahu pulls out of US nuclear summit

Israeli officials have announced that Prime Minister Benjamin Netanyahu has decided against attending a major summit on nuclear security due to be hosted by US President Barack Obama in Washington on Monday. Netanyahu reached this decision after learning that Egypt and Turkey are planning to use the occasion to demand that Israel join the Nuclear Non-Proliferation Treaty (NPT). In Netanyahu’s stead, Israel's Intelligence and Atomic Energy Minister Dan Meridor will attend the two-day summit, which will include representatives from over forty other countries.

Israel has never confirmed or denied that it possesses nuclear weapons. For years, however, Jerusalem’s deterrent has been referred to by analysts as ‘the bomb in the basement’. After the revelations of Mordechai Vanunu, a former Israeli nuclear technician, regarding the scope of his country’s weapons programme, the fact that Israel is a nuclear weapons state has been considered to be an open secret.

Kim Jong-il absent as North Korean parliament convenes

Analysts are anxiously awaiting the outcome of Friday’s convening of North Korea’s parliament. The Supreme People’s Assembly, considered to be a ‘rubber stamp’ institution, is the arena where personnel changes within the secretive nation’s ruling elite are made. In light of long standing rumours of Kim Jong-il’s deteriorating health, it is thought that the formation of this parliament may reveal his successor. Intelligence sources speculate that this could be his youngest son, the 26 year old Kim Jong-un. South Korea’s Yonhap news agency has reported that Kim Jong-il has not attended the session, but that in itself is not unprecedented.

Last year’s parliament saw the DPRK’s leader make his first public appearance since his rumoured stroke in 2008. He appeared gaunt, with thinning hair; though state depictions of the ‘dear leader’ since then have shown his health apparently improving. A potential change in the country’s leadership comes at a sensitive time for the DPRK, with mounting pressure to resume nuclear disarmament talks, as well as a recent controversy surrounding the sinking of a South Korean naval vessel in disputed waters off the DPRK’s coast two weeks ago. Although the South Korean government has generally called for calm pending the result of an inquiry into the sinking, the country’s defence minister has suggested that the sinking could have been caused by a North Korean torpedo.

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