The real test for China may be if the country can commit to hard targets under a new Copenhagen climate treaty.

I was once concerned that Congressional fury over China’s undervalued currency and our huge bilateral trade deficit would combine with resentment over the costs of climate change legislation, and over China not doing enough to curb its emissions.

Climate and energy — far from becoming a new area of cooperation between the U.S. and China, as I have advocated — would instead become a new irritant in the relationship, and climate negotiations would devolve into even more bitter fingerpointing across the Pacific, delaying progress on the fight against global warming. Most recently, Paul Krugman explains why we don’t have any time to waste.

So far, at least, this train wreck has not come to pass. China has taken impressive steps on energy conservation, as this report from my colleagues at the Center for American Progress details. Beijing may even reject the Hummer deal on environmental grounds — how very sane.

The real test, though, is whether China will commit itself to hard targets under a new Copenhagen climate treaty. Meanwhile, in Washington, the Waxman-Markey legislation, which creates a cap and trade system for carbon, just passed the House. It would slap tariffs onto goods from countries that do not accept limits on global warming emissions, but only after a whole bunch of criteria are met and other remedies tried first. Given the politics, that showed real restraint. Overall the bill is far from ideal. It is, nevertheless, something.

President Obama has gone farther to head a trade/climate collision off at the pass by announcing Sunday that he didn’t support the trade sanctions in the cap and trade legislation. He gets a two-fer for this, in typical Obama Administration fashion. First, he is showing leadership on international trade. Protectionist measures are being enacted all over the world despite promises to the contrary, and in the lead up to the G-8 and G-20 meetings in Italy next week, this shows wise economic leadership on a tough issue that does threaten to exacerbate the current crisis, according to most experts.

His statements also serve the U.S. from a climate negotiation point of view. They signal to countries, particularly China, that the Administration will negotiate in good faith and hold off on trade punishments if they are forthcoming at Copenhagen – if.  Let us hope they are.

- Nina Hachigian

Photo courtesy of Flickr user PeacePlusOne under a Creative Commons license.

A poster in Argentina urges citizens not to hoard money.

Argentina is facing problems keeping enough small coins in circulation, and the shortage causes problems for citizens trying to do everything from riding the bus to laundry.

Benjamin Gedan is a Fulbright research scholar living in Montevideo and studying the Uruguayan media. He writes at his blog, “Small State,” about how the change shortage has impacted daily life in Argentina.

In a land without coins, drama in every transaction

I didn’t cause this crisis, but I sure didn’t help fix it.

Packing up my Montevideo apartment last week, I noticed that I’d accumulated a handful of Argentine monedas (coins). At least four one-peso coins, and that’s not counting the one I held onto for a few months this winter before giving it as a welcome gift to my friend Pedro, an Argentine expat who was visiting relatives in Buenos Aires.

Normally, a few local coins might seem like a harmless souvenir. But among the many shortcomings of the Argentine government, it turns out, is an inability to keep enough coins in circulation, helping to slow an economy already careening toward another financial crisis. The sheer bizarre hilarity of what Slate magazine has called “the world’s most annoying economic crisis” is subjecting the Kirchner administration to a stream of ridicule unusual even for an Argentine leader.

“Each daily transaction from shopping at the supermarket to riding a bus involves careful planning, literally down to the last cent,” Time magazine wrote in November. Small shops give candy instead of change. Big supermarkets round off the difference in their favor.

The cause of the coin crisis is not clear, or, as Slate put it, “no one can say what’s causing this absurd situation.” Some blame a “black market of hoarders” who sell coins in bulk to retailers, according to Time. That sounds plausible to me; among the coin-sellers operating in Buenos Aires are businesses owned by the same bus companies that refuse to accept bills, tokens or electronic fare cards from riders. Others, however, blame the Argentine government for not minting enough coins to meet demand and for failing to crack down on the illegal sale of metal currency.

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The views expressed by contributing bloggers do not reflect the views of Worldfocus or its partners.

Photo courtesy of Flickr user remi de nimega under a Creative Commons license.

The the appreciation of the yuan against the dollar has slowed.

The U.S. Treasury has asked China to enact currency reforms because the appreciation of the yuan against the dollar has slowed and China faces risks if the global financial crisis worsens.

In the past, the U.S. has accused the Chinese government of maintaining a low value of its currency to keep its exports competitive.

David Dollar is based in Beijing and is the World Bank’s country director for China and Mongolia. He writes at the “East Asia & Pacific on the Rise” blog about China’s exchange rate strategy.

On exchange rates, think multilaterally

When U.S. policy-makers come to Beijing for their Strategic Economic Dialogue, one of the contentious issues is China’s exchange rate policy. Some fresh perspective on the issue can be gained by looking at China’s exchange rate in a multilateral context. After all, China’s largest trading partner now is the Euro zone, and China is Japan’s largest trade partner – so the yuan-euro and yuan-yen rates are as important as the yuan-dollar rate in today’s world.

To simplify these complex relationships, economists like to look at the trade-weighted or “effective exchange rate.” This tells you what is happening to the yuan on average against all China’s trading partners (with each weighted for its importance in China’s trade). In 1994 China started to peg its currency to the U.S. dollar at a rate of 8.3 yuan per dollar. But it’s interesting that the effect of this choice of “stability” for the currency was to bring about gradual and sustained appreciation of China’s effective exchange rate from then until about 2002. Over that period on average the U.S. dollar was appreciating against China’s other trade partners and China followed the dollar up.

This turned out to be a good exchange rate strategy for China. From 1994-2002, China had a modest current account surplus that did not change very much. As a developing country with rapid productivity growth, China’s external accounts were kept roughly in balance by the gradual appreciation resulting from the link to the dollar.

The problems for China began early in the 2000s, as the dollar began to devalue against other major currencies in the wake of large fiscal stimulus in the U.S. Since China had good results from the peg to the dollar during the 1990s, it was a natural choice for the country to stick with the peg. However, in this new environment, the Chinese yuan then followed the dollar down – the effective depreciation from 2002 until 2005 was nearly 20 percent. Combined with the ongoing productivity growth, this devaluation led to rapid expansion of the export sector and the expansion of the external surplus to a whopping 12 percent of GDP in 2007.

While it was nice to have this kick to growth, this surplus was not in China’s interest. As a developing country with a high rate of return to investment, it does not make sense for China to export capital on this scale. The effect of the large surplus was to put a lot of liquidity into the system that then fueled booms in the stock market and real estate. Also, the export sector expanded too much, and now is almost certainly faced with serious over-capacity.

In retrospect, China stuck with its peg to the dollar for too long. It started to appreciate against the dollar in 2005 and since then has appreciated a cumulative 18 percent. With the recent global financial crisis, the U.S. dollar has appreciated –- somewhat ironically, since the crisis originated in the U.S. –- against other currencies.

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The views expressed by contributing bloggers do not reflect the views of Worldfocus or its partners.

Photo courtesy of Flickr user Frankenstein under a Creative Commons license.