Our So-Called Foreign Policy: Putting the “Dip” in U.S. Diplomacy

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bailouts, Brazil, China, China meltdown, China stock markets, CNN, Congress, coupling, decoupling, Denise Labott, emerging markets, Exim, Export-Import Bank, export-led growth, free trade agreements, global leadership, Hillary Clinton, IMF, International Monetary Fund, international organizations, Iran, Iran deal, Jackie Calmes, Obama, Our So-Called Foreign Policy, Russia, The New York Times, TPP, Trans-Pacific Partnership, Wendy Sherman

It was unintentional to be sure, but the establishment media should get some credit for providing the following two reminders of how positively dippy American foreign policy, and the analysis of this diplomacy, has become.

The latest came just yesterday, in New York Times correspondent Jackie Calmes’ article titled “I.M.F. Breakthrough Is Seen to Bolster U.S. on World Stage.” And in the likely case that Calmes isn’t responsible for the headline, the thrust of the piece is clear from the lead paragraph:

“A string of agreements between the White House and Congress, capped by last month’s surprise accord that ended a five-year impasse over the International Monetary Fund [IMF] has eased, though not dispelled, concern that America is retreating from global economic leadership.”

I’ve already explained here and here (among other places) why Calmes decision to include on this list Mr. Obama’s Trans-Pacific Partnership trade deal and Congress’ decision to restore to life the Export-Import Bank makes no sense. So I’ll concentrate on the development she focuses on: Congress’ agreement to approve reform of the International Monetary Fund that grants more voting power to so-called “emerging market” (EM) countries like Russia, India, and especially China.

The IMF decision itself is idiotic enough. The rationale – supported by virtually every other member of the Fund – has been that these countries represent the rising powers in the global economic system, and therefore deserve more clout in one of the international organizations charged with overseeing this system. The trouble is, these countries’ wherewithal was greatly exaggerated even when they were growing strongly. The main reason is that their growth depended heavily on exporting to wealthier countries like the United States.

They’re still largely export-dependent, but rather than global growth leaders, they’ve become global growth laggards. Brazil, for example, is facing the prospect of its worst recession in more than a century. On top of its geopolitical trouble-making, Russia’s an economic mess. And China looks not only to be slowing dramatically, but completely incompetent in regulating its financial markets (not to mention its own aggressive regional moves). Even acknowledging that the United States, the European Union countries, and Japan haven’t been economic standouts either for many years, what’s the merit case now for augmenting these countries’ international influence?

But Calmes’ thesis is inane on many more fundamental levels, too. Chiefly, it parrots a series of commonplaces that, though endlessly repeated by mainstream foreign policy analysts and the politicians that bewilderingly still listen to them, keep undermining the effectiveness of American diplomacy. They start with the idea that the IMF, or any other international organization, has counted for much in world affairs. These institutions are logistically useful in providing fora (i.e., “buildings”) in which leading powers that communicate, negotiate, and otherwise deal with each other. But they have no autonomous ability to affect the course of events.

The Fund is often seen as an exception even by avowedly realist thinkers who normally take a dim view of international organizations, but contrary to Calmes’ claim, it per se has never served as “an international lender of last resort to foster global stability.” After all, it has no capacity to create wealth or other resources. In the last analysis, its lending function has always been carried out by the United States and the other major powers, who have used the Fund as a conduit. For two decades starting in the 1970s, the Fund addressed a series of financial crises in developing countries with a series of bailouts (again, financed ultimately by its members) that were conditioned on economic reform programs. But even the Fund’s staff now acknowledges that much of the advice it dispensed was lousy.

And since institutions like the Fund don’t serve as significant force multipliers for strong, wealthy countries like the United States, they’re anything but indispensable for American world leadership, economic or otherwise. As with the case of all countries aspiring to this goal, that flows from America’s own capabilities. Indeed, given America’s still crucial role as the world’s market and consumer of last resort, we’ll know that its economic leadership is at risk when its trade partners figure out another way to grow adequately.

Finally, there’s the question of whether the United States needs world leadership in the first place. I’ve explained in detail why a country this strong, wealthy, and geographically secure can remain more-than-adequately safe and prosperous even in a deeply troubled world. Indeed, America’s matchless capacity for self-sufficiency nowadays argues for less of what foreign policy types call world leadership by Washington – and therefore less exposure to the world’s woes – not more. I’m not saying that these views are beyond criticism. I am saying that they were worth debating even during the Cold War, they’re worth debating more now, and it’s dismaying that no one relying on Calmes or her Mainstream Media counterparts for their news in 2016 would have a clue that it’s not still 1956 strategically.

The second example of foreign policy dippiness came during the summer, from CNN’s Denise Labott’s August profile of Wendy Sherman, the chief staff-level U.S. negotiator of the nuclear weapons deal signed with Iran. Although I’m not enthusiastic about the agreement, I still view it as the best possible option available to America to keep Iran bomb-free short of military strikes. My confidence, however, has definitely been shaken having read Labott’s cheery revelation that “Her first career as a social worker and community organizer may seem like odd training for nuclear negotiations. But Sherman said she actually drew upon those experiences with her Iranian counterparts.”

Continued Labott : “Her ‘caseload’ may be more global, but she said the work is similar — involving the complex relationship and budding detente between Washington and Tehran, as well as managing a series of clients both inside and outside the meeting room.

“‘That skill set came in handy,’ she said. ‘You have to see all the parts in front of you. You really learn how to understand people.'”

Meaning no disrespect for the profession, but I can’t think of a background less suitable than social work for dealing with regimes like Iran’s (or North Korea’s – which was a Sherman responsibility under former President Clinton). Unless you think that the ruthless mullahs in Tehran or the arguably sociopathic leadership in Pyongyang have anything in common with a troubled American individual or family? And that the assignment is providing relief?

From another standpoint, social work and comparable activity are defined by enhancing a client’s well-being. Self-interest doesn’t even enter the picture. Is that how Sherman viewed her priorities? At least judging from this article, that’s how it seems. And Labott apparently considered this nothing less than delightful.

An optimist could finish Labott’s profile relieved that Sherman is now esconced in the academic world. A pessimist, though, could note that she’s a close confidante of her former Foggy Bottom superior, Hillary Clinton, and that she’s being talked about as a possible Secretary of State herself should the Democratic front-runner win the White House.

Making News: Podcast of New BBC Interview on China and Global Markets

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BBC, China, China stock markets, currency, currency wars, devaluation, emerging markets, export-led growth, Federal Reserve, finance, interest rates, investing, Making News, monetary policy, recovery, Trade, Wall Street, yuan, ZIRP

I’m pleased to announce that I was interviewed on the BBC this morning on China’s economic and financial turmoil, and how it’s been shaking the world’s economy and financial markets.  Click on this link for the podcast.  My segment is titled “Global Markets React to China’s ‘Black Friday'” and yours truly comes in at about the 7 minute-50-seconds mark.

Moreover, even as we speak, I’m working on a more detailed analysis that I hope to post shortly.  Stay tuned!

(What’s Left of) Our Economy: America’s Real Stake in China’s Stock Meltdown

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central banks, China, China meltdown, China stock markets, currency, currency manipulation, Federal Reserve, financial reform, IMF, monetary policy, Obama, PBOC, reserve currency, TPP, Trade, Trans-Pacific Partnership, yuan, yuan internationalizaton, {What's Left of) Our Economy

Today’s big financial news story was the record daily plunge in China’s main stock market – the Shanghai exchange. (I know the term “market” is a complete misnomer for an arrangement so thoroughly controlled by the government; I just use it as shorthand.) Those who follow such matters know that this latest nosedive is prolonging a vicious bear market Chinese stocks that began in early July, and that could have knock-on effects throughout the world economy in forms ranging from continued downward pressure on raw materials prices, to strengthened overall deflationary forces (which are a major threat to global recovery), to severely damaged prospects for Apple Computer. (This longtime U.S. stock market winner has become ever more dependent on booming sales in China and, just as important, its share prices are ever more dependent on perceived chances of more of the same.)

So clearly, both investors and economists understand that China’s stock market woes will reverberate far beyond China – whether they greatly slow down China’s growth rate or not. I’d like to add one more impact – on China’s plans to internationalize its currency, which greatly affect the yuan’s value and, in turn, U.S.-China trade flows and the fortunes of American manufacturing. And anything that affects a portion of America’s productive economy as important as manufacturing is bound to affect its chances for sustainable prosperity.

One of the biggest challenges facing China’s leaders today is reconciling two goals that at least in the short run seem mutually exclusive. The first is that internationalization of the yuan. This would be a difficult objective even in the best of circumstances for China. The benefits would be considerable: A currency widely used by the rest of the world in trade and other commercial transactions, and even better, one awarded reserve currency status by the International Monetary Fund, would be a currency that would increase China’s monetary and therefore economic independence.

No longer would China’s own price levels, competitiveness, inflation rates, growth rates, and attractiveness to domestic and foreign capital depend so significantly on the whims of central banks from today’s reserve currency countries, and especially the U.S. Federal Reserve. Indeed, China’s own monetary policy could influence over other countries’ economies to a degree. Just as important, reserve currency status would reinforce the idea that China had genuinely arrived as a global power – a status reportedly highly valued by Beijing.

At the same time, these benefits still lie very far in the future, since although the yuan’s use in international business is rising rapidly, it’s still at very low levels. One big reason is that neither Chinese nor foreigners are very free to trade China’s currency, though exchange and trading controls have eased a bit in recent years.

Meanwhile, the yuan internationalization drive is already exacting costs. The small degree of liberalization that has occurred reduced the Chinese government’s once-absolute control of its own financial system – meaning its ability to determine how resources are invested. For an economy that’s still dominated by the state, that’s a big deal.

In addition, because China’s version of a central bank in particular seems to realize that a globally used currency needs to be tradeable, and reportedly views it as an aid to broader financial reform, it has allowed the yuan’s value to rise to levels much closer to those that would be deemed appropriate by market forces – at least judging from the yuan trading markets that have sprung up outside China in recent years. As a result, Chinese goods have lost some price competitiveness in China and other markets against goods made by most rivals – including the United States. For an economy whose growth and job-creation still rely heavily on exports, that’s a big deal, too.

Adding to these yuan internationalization problems – these are not the best of times for China. Far more important than the stock market plunge is a growth slowdown that is widely thought to be more dramatic even than the one revealed by official Chinese economic data. And yet the stock meltdown could turn into another big drag on the broader economy if it begins to undermine the confidence of consumers and businesses, and if it starts creating political turmoil by puncturing the aura of economic competence that’s been at the heart of the government’s perceived legitimacy.

Although the Chinese regime’s future is hardly resting on a knife-edge, any lengthy period of subpar growth – and any lengthy pause in the rise of Chinese living standards – could confront China’s leaders with the kinds of tests they’re not used to taking. That’s why I suspect that if push comes to shove, and the economic falters sufficiently, even a regime representing a culture known for thinking and planning long term will suspend the internationalization campaign and start encouraging yuan weakening again. Indeed, Beijing followed precisely this course during the mid-1990s. The conventional wisdom believes that meaningful devaluation is no longer possible, since it would speed up capital flight that appears already to be unprecedented. But I don’t believe that Beijing would hesitate for a moment to reestablish tight capital controls in response. 

Of course, this kind of Chinese currency gambit would work even in a slow-growing world, by enabling artificially cheap Chinese products to boost their share of foreign markets, and help China expand at the expense of its trade partners. Yuan weakening will fail if the rest of the world, especially the United States, pushes back. President Obama seems an unlikely candidate to lead or even participate in this charge. His administration’s view, as made clear in the debate over fast track trade authority and his Pacific Rim trade deal, is that largely because China (a prospective member) has let the yuan strengthen, no measures are needed in trade agreements to ban the practice. As a result, unless and until Congress changes its mind on the issue, Americans will need to hope that Mr. Obama is right that past won’t be prologue.