Jagdish Bhagwati: Stop Worrying about China's Currency

Article excerpt

Byline: Joel Schectman

As leaders from the world's 20 major economies prepare to meet in Seoul this week, tensions continue to flare over trade imbalances and currency rates, particularly when it comes to China. Some analysts even say a trade war is underway. In the meantime, Germany and Britain are creating a group of experts to promote trade liberalization across the globe. Co-heading this group will be Jagdish Bhagwati, 76, a Columbia University economist. In the lead-up to the G20, NEWSWEEK's Joel Schectman spoke to Bhagwati about the meeting's prospects for success.

Do you think that the U.S. and China should use this meeting to hash out an agreement on how the yuan is valued?

No. I think it's a mistake. The issue is overstated. What you should really be worrying about are the underlying mechanics, the policies, the fundamentals. The situation is going to be corrected by China's own self-interest point of view. Let's be a little more relaxed.

So what fundamentals should the U.S. and Europe focus on?

Let's do a mental experiment. Pretend that Greece had changed their exchange rate during their crisis. They couldn't because it's part of the euro zone, but pretend. As long as there was massive excess spending, no amount of devaluation would have made the slightest bit of difference, because the internal system will adjust to it. The focus really ought to be on excess spending in the U.S., because that is what causes a trade deficit.

So you believe that the U.S. should cut spending now? Even with the economy still sluggish?

No, in the short term we need to spend more, which will make the trade imbalance worse rather than better. On that I am very Keynesian. But in a few years the U.S. will have to get its own house in order if we are worried about the trade deficit. It's going to be tough.

The Fed recently went back to printing money. Is it fair for China to say that America is pushing down its currency, too?

If we are attacking their internal fundamentals, then there is a parallel to someone attacking our own internal fundamentals. …