It used to be that most economic commentators' worst fear was a trade war causing a proliferation of "beggar-thy-neighbor policies" across the globe. China's persistently, artificially low currency rate seems to be changing that. In the past week, Martin Wolf and Paul Krugman, two big guns in the world of economic commentary, have argued for the need to play hardball with China. Beijing's currency manipulations are causing serious distortions in the world economy, they argue, and it's time to increase pressure for a change. Others don't think gloves should be removed just yet.

  • 'Actions, Not Talk, Matter'  Says Paul Krugman: "look, if China continues on its present course, eventually we will have some serious currency and trade conflict. Furthermore, we should." In his view, "China blatantly reneged on earlier promises about the exchange rate. They must take us for fools--because we (or at least some of us) are."
  • It's Manipulation, It Matters, and We Should Do Something, declares Financial Times' Martin Wolf, going down a list of questions regarding the Chinese currency debate. They all, he says, "[lead] to the final question: how might China be cajoled or coerced into changing its policies? Negotiation remains a hope," he says, but "alternatives must be considered." He favors "intervention in capital markets" over "action against trade," since the latter "would have to be discriminatory" against China, specifically, which "would almost certainly be a violation of the rules of the World Trade Organisation. A trade war would be very dangerous." Nevertheless, he's unconcerned by such usual arguments that "a cessation of Chinese purchases of US government bonds would lead to a collapse." First of all, he says, there would be no collapse, but secondly, a weaker dollar "would be helpful, not damaging." The bottom line, he says, is that "the post-crisis world economy will not work so long as its most dynamic economy is also its largest capital exporter."
  • No One Is In a Position to Do Anything  Recent Chinese aggression on a number of matters, argues financial journalist Eric Weiner in the Los Angeles Times, show that "the country's leaders know what our leaders are only beginning to understand--that China would probably win a global trade war." In various testing scenarios run by the Pentagon in 2009, he explains, "the U.S. consistently lost to China in economic warfare." Why?
Part of the reason was that the U.S. could be easily distracted by expensive side conflicts that sapped our economic strength. But the more important reason was that China could inflict real pain on the U.S. without feeling it at home. For instance, by simply moving the maturities of some of its $850 billion in Treasury holdings from 90 days to 60 days, it could cause chaos in the U.S. stock markets.
  • Yeah, This Would Be Dangerous  Responding to the Financial Times column, econoblogger Yves Smith judges "the odds of things going Wolf’s way as close to zero." For starters, "the impetus to put pressure on China IS coming from the trade front, due to high unemployment," making a trade war more likely.
To add to the odds of misunderstanding: studies of negotiations typically find that the participants’ assumptions about their opponent's motivations and priorities are often incorrect. The odds of miscalculation have to be magnified when operating across a large cultural divide.
  • The Wrong Time to Start an Economic Battle  "Surely," writes a shocked Ryan Avent in response to Krugman and Wolf, "we haven't all lost our minds and decided that now, of all times, is the right time for the world's largest economy to go antagonising the world's second largest economy." He's aware that he doesn't have Krugman's experience, but asks readers to consider the history of protectionist policies: "let's be honest, when has this ever worked?" In addition, he points out, "America has a whopping big alternative to both negotiations and trade war available to it--one which happens to be win-win. That is: pursue adequate fiscal and monetary stimulus."
  • The Treasury Secretary Speaks  Tim Geithner's remarks at Brookings earlier Wednesday suggest the administration still thinks it wise to tread carefully. Calling the issue "a multilateral problem," Geithner called exchange rate manipulation "unfair," but suggested a "cooperative approach," and called for a "multilateral mechanism to encourage economies ... to abandon export-oriented policies." In other words: still fairly soft language.