[Lee Hsien Loong] Yuan revaluation benefits China, U.S.

The world has recovered remarkably quickly from the financial crisis. But growth is now on two tracks: developed economies still struggling with fiscal, financial and structural problems, while emerging economies, especially in Asia, are growing robustly. The resulting global imbalances have created international tensions. 

The Group of 20 has emerged as a forum to tackle these issues. It was especially effective during the crisis, and remains valuable as it is more inclusive than the G8.

The most consequential relationship in the world today is between the U.S. and China. There has been significant friction, notably over exchange rates. The yuan issue is politically hard ― the U.S. sees an undervalued Chinese currency as unfair competition, while China fears that sharp revaluation will disrupt its economy, causing unemployment and unrest.

But from an economic point of view, this needn’t be a win-lose battle. A gradually appreciating yuan will encourage Chinese export industries to restructure and upgrade, help distribute the gains from growth more broadly beyond exports to the rest of the economy, and mitigate inflation, which is a growing problem in China. At the same time, it will help ease political pressures in the U.S. and tensions in the relationship.

The U.S. and China need to build mutual trust, in order to cooperate on a range of tough international issues, including Iran’s nuclear program and North Korea. Otherwise each side will doubt the other’s motives, especially when problems arise, such as over competing claims in the South China Sea.

The world is witnessing a gradual shift in the relative balance of influence and economic power. The U.S. will remain the pre-eminent superpower for decades. But Asian countries see and sense China’s growing influence and are adjusting their stances to benefit from that nation’s growth and to consolidate their relationships with China. Yet almost all of them wish the U.S. to stay engaged in Asia. They want to be friends with both the U.S. and China, and not be forced to choose sides.

The Chinese are aware of foreign perceptions that with growing strength it has become more assertive. China’s leaders have emphasized that the country is committed to peaceful development and has no aggressive intentions. China’s domestic challenges are numerous and daunting. Its government must uplift hundreds of millions who remain in poverty, create social safety nets for its people, moderate major disparities in wealth and development, and maintain social and political stability so that progress can continue.

No less than the U.S. or other democracies, China has its own domestic politics that it can’t ignore. China’s leaders need to explain this reality, and their basic thinking, convincingly to international audiences, who see Beijing and Shanghai and think that is China. But countries will also watch China’s actions ― how it conducts itself on international issues such as climate change, and what the leaders say to their own people on China’s role in the world.

As world economies recover, governments must continue promoting global trade, to deepen the international division of labor and foster long-term prosperity for all. More immediately, the win-win results of freer trade will give a badly needed boost to demand and growth. During the crisis, protectionist pressures were a real worry. Fortunately, governments took fewer protectionist and retaliatory actions than many feared, but they also made very few positive trade moves.

In the U.S., there is little political appetite for free trade; hence the slow progress of its bilateral free trade agreements and the World Trade Organization’s Doha Round. But there are some recent positive developments. The renegotiated free-trade agreement between South Korea and the U.S. was settled recently, though not yet ratified. The U.S. is also one of nine Asia-Pacific countries negotiating a Trans-Pacific partnership, which will be a pathway toward the Asia-Pacific Economic Cooperation’s vision of a free-trade area of the Asia-Pacific region.

Countries shouldn’t rest there. Leaders need to persuade electorates worried about unemployment and apprehensive about the future that free trade will benefit them in the long term. Globalization poses significant challenges to countries. Competition is intense, change is continuous, and the fruits of prosperity are unevenly distributed. But trying to shut out competition or freeze the status quo will fail, nor will currency realignments create real, sustainable prosperity.

The only reliable strategy for improving the lives of citizens is for countries to upgrade the skills of their people and the capabilities of their economies. This means educating the population to enhance their earning power, investing in technology and infrastructure to raise overall productivity, developing new industries to replace declining ones, and constantly adapting to stay relevant in a changing world.

Beyond promoting growth, governments must build political support for free markets and economic integration. Growth has to benefit the many, not just a few. The state needs to tilt the playing field in favor of the less successful, and those having difficulties keeping up. But it must do so in a sustainable way, without undermining the human drive to do well and get ahead. This is what Singapore is striving to do, to improve its people’s lives and advance as a nation. 

By Lee Hsien Loong

Lee Hsien Loong is the prime minister of Singapore. The opinions expressed are his own. ― Ed.

(Bloomberg)