The US-China dispute and the global financial and ecological imbalances

In his meeting with Senate Democrats yesterday several questions dealt with China’s currency policies. These questions and Mr. Obama’s answers show that an important cause of these policies and of the currency dispute is not being recognized.

China’s currency, the RMB, may be undervalued between 25-40% and this may look as currency manipulation by the US. For China its currency serves to make its exports expand and provide income for its national coffers. This export driven development model will be adjusted in due time, placing more emphasis on local consumption. As part of that policy change, the global financial imbalances will also be reduced.

The reason that this adjustment has not yet happened and that the dispute will continue for an unforeseeable time is that its fundamental cause is not recognized. It is the international monetary non-system with its floating exchange rates and a global reserve system that is based upon a national currency. As long as the US dollar continues to function as the main reserve currency, the international monetary system will be not only unsustainable and inequitable, and, therefore, unstable. Progressing to a non-national reserve currency as proposed by the UN Stiglitz Commission in June 2009 would constitute the beginning of real negotiations between the US and China. One is not to forget that China herself a few days before the London Summit of the G20 proposed the need for a “supranational currency”.

Once both nations and the G20 recognize the need for reforming the international monetary system by working towards a new global reserve system, this new system will also contribute to reducing the global financial imbalances that cause so much volatility and increased transaction costs in international trade.

However, the International Institute of Monetary Transformation believes that these nations have to go one gigantic, i.e. transformational step further. If they base the new reformed global reserve system on a carbon monetary standard with its synthetic accounting unit of the Tierra the international community would integrate the enormous challenges of the climate crisis into the operation of its monetary, financial, economic and commercial systems. The acceptance of its Tierra Fee & Dividend system would institutionally deal the present ecological imbalances by having nations include in their balance of payments a carbon account that like their current and capital accounts have to be balanced. This modified balance of payments would become an institutional mechanism where the carbon debts in countries in the global North can be settled with the carbon credits of countries in the global South. Nobody can argue that there does not exist a global ecological imbalance, caused by the atmospheric occupation of the industrialized nations since the beginning of the industrial age. It is their recognition of this ecological indebtedness and the ensuing responsibility that is key to successful negotiations within the framework of the UN FCCC.

Returning to the currency dispute one can consider it to be a golden opportunity for the US and China to make progress in their pursuit of all the good intentions reflected in their joint statement of November 17, 2009. Once they, as a G2 partnership, manage to forge a programme of work for their part in reducing the global financial and ecological imbalances all the other international groups--G7, G8, G13, G20, G77 and finally G192—will be able to contribute according to their “respective capabilities” based upon their “common, differentiated responsibilities”.

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