The coming trade war

The columnist, Paul Krugman, wrote that there was probably no strategy behind China's accumulation of some two trillion US dollars and that those reserves were acquired in "the same way Britain acquired its empire: in a fit of absence of mind." Of course, Great Britian had no grand plan at the beginning of the 18th century. Nevertheless, I am not sure what Mr Krugman is trying to say here or say when he likewise contends that China had no strategy when it started to accumulate dollars. The British Empire, we know, was spawned by an ability to react pragmatically to a given situation and the Chinese leadership in Beijing has shown time and time again that it is invariably pragmatic. Indeed, this pragmatism is evidenced by its unwillingness to pull the plug on the United States so long as the yuan is pegged to the dollar. Indeed, my assertion is that it suits China to have a weak dollar.

Of course, in the longer term this reliance on the dollar will have to be broken if China is to replace the United States as the world's major power. Moreover, while there are a number of reasons why this won't happen in the shorter term, it is silly to insinuate that the Chinese have some sort of sentimental attachment to the dollar-based international financial system because it is they who have benefited most from that system.

Indeed, it would appear that China is already preparing a three pronged assault on its dollar reliance by building huge gold reserves, cutting its US bond holdings and starting limited cross border trading with yuan. Whatever else, while pragmatism dictates that the Chinese leadership in Beijing is not going to cut off its nose to spite its face, there is enough evidence to suggest that the financial crisis last year has not only revealed serious flaws in a monetary system that facilitates Anglo-Saxon global hegemony, but could, indeed, also usher in the death knell of that system.

Nevertheless, let us be wary when it comes to predictions. The Economist Oliver Accominotti's comparison between China's dependency on the dollar and France's dependency on sterling from 1926 until 1931, makes interesting reading and his conclusion that "foreign reserves can be both a source of instability for the international monetary system, and a burden for large holders", is sound. However, it is the Anglo-Saxons who have been there before and it is to the "satanic genuis" of Sir Montagu Norman, the Governor of the Bank of England who ensured that France was to give up all aspirations to monetary hegemony, that they will look for their inspiration.

Of course, it might be added, that when it comes to a trade war, the Anglo-Saxons do not need any role models to play their "game". Still, we might wonder if the "pragmatic" Chinese might not be a slightly different proposition from the French in 1926 and the "Asian Tigers" in 1997.  Only time will tell but we can rest assured that at the very least a trade war between China and the United States will be required to end any speculation.