In These New Times

A new paradigm for a post-imperial world

Beijing-Tokyo monetary agreement threatens the West

Posted by seumasach on December 28, 2011

New Europe

28th December, 2011

The China-Japan agreement to stop using the dollar, or any other currency, in their bilateral transactions was a very strong blow to the US financial standing in world affairs. To a lesser degree this Chino-Nippon agreement is also detrimental to the Eurozone.

It seems that the two most important export oriented economies of east Asia are now seeing themselves as an independent economic entity, but they forget that their growth and well being hinges on their exports to the US and the Eurozone. The monetary agreement between Beijing and Tokyo does not only aim at pushing aside American and European currencies, but also is meant to immunise east Asian economic growth from the west and the problems that the Eurozone and the US are now facing. But is this possible?

To Americans and Europeans the answer is no, but the very fact of this agreement is a clear indication of the Chino-Nippon efforts to appear as an independent financial and trade region, with huge concomitant political implications. In any case the US and the Eurozone felt the heat at a time when both those western economic and financial powerhouses needed help. The US needs to be able to maintain the attractiveness of all dollar values as the safest place in the world to deposit wealth and the Eurozone needing external help from both Japan and China to overcome its sovereign over indebtedness.

Obviously Beijing and Tokyo know that the West is now expecting them to use at least a part of their huge foreign trade surpluses accumulated over decades at the expenses of the US and Europe, to support Washington and Brussels in a time of need. Of course there other developing surplus economies, like Brazil and Russia, depending on exports to the US and Europe for their well being that could be called in to support the Washington and Brussels at this difficult conjuncture, but it is only Beijing and Tokyo that hold enough wealth to effectively support the entire Atlantic financial volume in this difficult times.

If the dollar loses its power to attract the world’s savings and reserves and New York banks stop spinning around those reserves, the US economy will shrink and will probably disintegrate under the huge weight of its fiscal and foreign trade deficits.

On the other side of the Atlantic, Germany and France discovered to their dismay, that the world’s financial markets are very sceptical about the Eurozone’s ability to effectively counter its sovereign debt problems. The last EU Summit of 9 December in Brussels explicitly asked China and Japan to help the Eurozone through the IMF, solve this problem.

In short, the last step by Beijing and Tokyo to create something like a monetary zone between them, leaving the US and the Eurozone out, came as a surprise and severe disappointment to both Washington and Brussels. If China and Japan continue in this road they will push the world to inward looking ways and it is questionable which side will lose most if this de-globalisation gains momentum.

Japan in the 1960s and 1970s and China in the 1980s and 1990s gained exceptional places in the world just by selling their goods to the West. As things stand it is impossible to re-orientate their economies to inwards looking growth and thus maintain their economic activities. In this way China also risks having a lost decade as Japan had after the turn of the Millennium. It remains to be seen if the two countries will continue in this dangerous path, trying to send the world through uncharted waters.

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