Krugman calls for US sanctions to tackle undervalued Chinese currency

Nobel Laureate Paul Krugman has urged the US to act strongly and even impose sanctions on China to prevent its mercantilist policies.

In a blog for the New York Times, Princeton University’s professor of economic and international affairs said dialogue was not enough to tackle the widening international imbalances and the risk of sparking a trade war is a lesser danger than allowing the Chinese authorities to continue propping up its own economy at the expense of others.

‘Right now, China is following a policy that is, in effect, one of imposing high tariffs and providing large export subsidies — because that’s what an undervalued currency does,’ he said.

‘That should be a violation of trade rules; it might in fact be a violation, but the language of the law is vague on the subject. But leave aside the fine print of the law for a moment: what China is doing amounts to a seriously predatory trade policy, the kind of thing that is supposed to be prevented by the threat of sanctions.’

Krugman stressed that previous attempts at engagement had failed because China does not believe that the US will act and until that changes the US is ‘whistling in the wind.’

‘I say confront the issue head on — and if it leads to trade conflict, bear in mind that in a depressed world economy, surplus countries have a lot to lose from such a conflict, while deficit countries may well end up gaining,’ he said. ‘Or to put it differently, right now we’re in a world in which mercantilism works. In the long run we’ll emerge from this kind of world; but in the long run …’

Krugman is not alone in his staunch views. Sarasin & Partners chief investment officer Guy Monson, has branded ‘outdated currency structures’, particularly the renminbi/dollar exchange, the greatest headwind facing the global economy.

He said around 58% of the world is in direct or indirect dollar pegs, which are increasingly distorting trade and capital flows.

‘The largest of these remains China's undervalued dollar peg that generates vast trade surpluses which have been amassed into a war chest of reserves ($2.5 trillion),’ Monson said.

‘While such excessive surpluses would typically cry out for a revaluation, heated politics and a nervous export lobby ostensibly remain in the way.’