LONDON (Business Day) -- Amid the inexorably rising US trade deficit, Washington is crying foul about "unfair" currency practices by its major trading partners. The leading economies of east Asia are seen as the main culprits, accumulating large trade surpluses and stockpiles of foreign exchange reserves while maintaining exchange rates that appear by all measures to be considerably undervalued.
If the US treasury will not act on these inequities, congress has threatened to.
Such was the situation confronting the Reagan administration in 1983 as complaints about Japanese trade and currency practices rose to fever pitch. Facing a similar challenge today over China, the Bush administration would do well to consider the Reagan treasury's innovative approach to financial diplomacy.
In November 1983, US treasury secretary Donald Regan and Japanese finance minister Noboru Takeshita issued a joint statement declaring that "open, liberal capital markets and the free movement of capital were important to the operation of an effectively functioning international monetary system". They established a group of officials on yen-dollar issues. It met six times in early 1984 and handed a report to the ministers in May that year.
The treasury's strategy was to promote a stronger yen by deepening the market for yen instruments and making yen assets more attractive to foreign investors.
As intended, the yen-dollar process contributed to the yen's long-term appreciation from its postwar fixed rate of yen360 to the dollar to about yen105 today.
Financial conditions in China today in many ways parallel those in early-1980s Japan. China's currency, the renminbi, or yuan, as the local equivalent is known, is estimated to be undervalued by as much as 25%-40%. Moreover, it is not convertible. Capital flows in and out of China are broadly government-controlled. Domestic capital markets are embryonic, with minimal foreign participation.
Of course, China is not Japan. Apart from differences in the two countries' exchange rate regimes, China is a developing country, with per capita income at one-thirtieth of Japan's. China's economy is more open to foreign direct investment than Japan's was then (or is now). And, whereas the US had considerable leverage over Japan via their security alliance, the Chinese are widely perceived to be less susceptible to gaiatsu (foreign pressure).
But the point is not to replicate the yen-dollar talks. Among other things, a dialogue with China should put more emphasis on promoting sound supervision of banks and better credit risk management.
If presented as a bold, new initiative with senior-level involvement, such a dialogue could also make political sense for the Bush administration, helping deflect pressure for less market-friendly remedies to perceived unfair Chinese practices.
The US treasury has come under fire for failing to name China a currency "manipulator" in its report to congress. Overt pressure is unlikely to persuade Beijing to revalue its currency or fix its banks. In its wrangle with China, launching "yuan-dollar" talks could be exactly the kind of creative financial diplomacy the treasury used so effectively with Japan.
Goodman, US treasury attache in Tokyo in 1992-97, is vice-president of Stonebridge International in Washington; Fauver, a former US treasury staff director, is president of Fauver Associates.
