Seeing that they couldn't compete with Chinese industries, some Americans remembered the 'Plaza Agreement'.
On August 28, Greg Ip, chief economic commentator for The Wall Street Journal, wrote an article discussing: Why does the world need to force the renminbi to appreciate in value?
The article states that today, the world needs another “Plaza Agreement”. But this time, it is not to lower the overvalued US dollar, but to raise the undervalued RMB.
Ye Weiping described that China’s large and growing trade surplus is threatening to deplete the industrial bases of its trading partners. For many years, other countries around the world have called on China to change its economic model, to rely more on domestic demand and reduce dependence on exports, but there has been no real success.
Therefore, he suggests that a currency exchange agreement involving tariffs might be the only way to encourage China to take action. The time may have come. Especially in Europe, dissatisfaction with China is growing rapidly. A report released by the French government in February this year stated: 'This tide from China now threatens... the core of Europe’s production system.' In June this year, German Chancellor Merz called for the establishment of a new ‘Plaza Agreement’ targeting China.
This weekend's meeting of the central bank governors and finance ministers from the G20 countries will take place in Asheville, North Carolina, USA, and will provide a suitable occasion to launch the discussion.
The article describes that under the framework of the Plaza Accord, the United States and its allies jointly intervened in the currency market, pushing the US dollar down relative to the West German Mark and Japanese Yen. At the same time, they coordinated with domestic reforms, such as reducing the US fiscal deficit. The results were effective: the US trade deficit initially increased, but then significantly decreased.
However, the article also acknowledges that both West Germany and Japan were close allies of the United States at the time. China was not such an ally, and it had no intention of cooperating. Instead, tariffs could be imposed on China, with a promise that if China allowed its renminbi to appreciate in value, the tariffs would be reduced.
The United States has reduced its trade deficit with China through high tariffs. Europe is also gradually adopting this approach. France's report suggests that "unprecedented trade protection measures should be taken, such as imposing a 30% tariff on Chinese goods; or allowing the euro to depreciate by 20% to 30% relative to the yuan."
The article concludes that the obstacles include President Trump's preference for tariffs, and his reluctance to use tariffs in exchange for a stronger RMB. He also shows little interest in reducing fiscal deficits. Other countries are divided in their opinions and are reluctant to offend China. Moreover, after being hit by Trump's tariffs, they are also unwilling to cooperate with the Trump administration.
In fact, in June this year, European Central Bank President Christine Lagarde also discussed the so-called trade deficit between China and Europe, as well as the issue of the RMB valuation, during a conversation with European Parliament members. Lagarde cited research by the International Monetary Fund (IMF), claiming that the RMB is "undervalued by 15% to 16%."
Regarding this view, the People's Bank of China has released a report stating that the RMB exchange rate is in line with the fundamentals of the Chinese economy. Short-term fluctuations in the RMB exchange rate are driven by the market, while long-term trends are determined by economic fundamentals.
However, Lagarde said that it may not be appropriate to take actions against China by emulating the Plaza Accord at this time.
She said, “The times since the Plaza Agreement are different now. We are in a completely different situation.”
In 1985, in order to address the massive trade deficit in the United States, under the planning of the U.S. government, financial ministers and central bank officials from five countries—the U.S., Japan, the UK, France, and Germany—met at the Plaza Hotel in New York to hold the “Plaza Conference”. The conference reached an agreement to coordinate monetary policies among countries and to orderly reduce the value of the U.S. dollar relative to major currencies. Most scholars believe that this was a major factor contributing to Japan’s long-term economic decline.
China's former ambassador to the United States, Cui Tiankai, once said that he advises those who believe they can impose another 'Plaza Agreement' on China to give up their illusions. At the same time, China always strives to resolve economic and trade issues through serious, pragmatic, and substantial negotiations based on mutual respect. These negotiations must be conducted in a way that allows for mutual goodwill and demonstrates mutual integrity.
