As the Obama administration escalates its battle with Chinese leaders over the artificially low value of China's currency, a growing number of countries are retreating from some free-market rules that have guided international trade in recent decades and have started playing by Chinese rules.
Japan and Brazil have taken measures recently to devalue their currencies, or at least prevent them from appreciating further against the Chinese currency, the renminbi. The House of Representatives last week overwhelmingly passed the first legislation to allow the United States to slap huge tariffs on Chinese goods unless China allows the renminbi to appreciate, another mechanism for making Chinese goods more expensive here and American exports more competitive in China.
In Europe, policy makers have begun to fret that, despite the debt crisis that sent investors fleeing just a few months ago, the euro has now risen sharply again against the dollar, potentially weakening exports by making European goods more expensive. Those exports have been one of Europe's few sources of growth, and President Nicolas Sarkozy of France, who will take over leadership of the Group of 20 biggest economies, said over the weekend that he was pushing for a new system of coordinating global currencies as wealthy nations did in the 1970s, before a free market orthodoxy took hold.
It is unclear if the result will be a "currency war," as Brazil's finance minister recently warned, or if these are just warning shots, fired to force Beijing's leadership to make good on years of promises that it would allow the value of its currency to appreciate.
But that question is so in the air that Treasury Secretary Timothy F. Geithner felt compelled last week to try to dampen the fear. "We're not going to have a trade war," he said at a forum sponsored by The Atlantic. "We're not going to have currency wars." He acknowledged that the only way to break the cycle was for a country "to decide it is in its own interest to allow its currency to appreciate in response to market forces," and he said he believed that a "substantial fraction of the Chinese leadership" now understands the need to allow the currency to rise in value.
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