The annual meeting of the International Monetary Fund in Washington has ended in disagreement. The "currency wars", identified by Dominique Strauss-Kahn, the IMF's managing director, are set to continue. In Washington, China was accused by the West of manipulating its currency in order to boost its exports. Western nations, for their part, were accused by China of destabilising the global economy by slashing official interest rates.
Often in such international disagreements there is some justice on both sides. But not this time: it is developed nations who are in the right. Central banks in rich nations have lowered interest rates to near zero because their national economies are still exceedingly weak. Their objective is not to steal market share from developing states but to nurture domestic recovery through keeping down the cost of borrowing.
China, by contrast, is indeed taking an unfair national economic advantage by manipulating its currency through mass purchases of US dollar assets. These purchases drive down the price of its own currency and deliver an effective subsidy to its exporters in world markets. The artificial competitiveness of Chinese manufacturers is hampering economic recovery in the West.
And it is not just the manufacturing sectors of developed nations which are harmed by this practice, but those of other developing nations such as Thailand and Vietnam. Brazil is beginning to suffer from its relatively strong currency too.
For the best part of four years, China's trading partners have been urging the authorities in Beijing to allow their currency to reach its natural level, as dictated by the double-digit annual growth it has enjoyed over the past decade. But diplomatic persuasion has failed. Beijing pays lip service to the need to change its ways, but its policy remains the same. The renminbi has risen by a paltry 2 per cent against the dollar since June this year. And in that time, China has continued to accumulate billions in dollar securities. In theory it is the responsibility of the IMF to prevent currency manipulation. But the Fund's mealy-mouthed communiqué at the weekend merely confirmed its impotence. The IMF has clout over national governments, it seems, only when it has been called in to provide emergency loans.
With the global economic recovery looking increasingly precarious, the time has surely come for serious action against China. Developed nations need to agree a common strategy for dealing with Beijing. Whether the action takes the form of imposing trade tariffs on Chinese manufacturers or preventing Beijing from acquiring foreign securities, there needs to be a response.
China's trading partners would benefit, but it would be just as much in the nation's own real interest. Though currency manipulation benefits China's politically influential export industries, it is not to the benefit of the general population. The intervention is distorting economic development in China, making the country perilously reliant on manufacturing exports for growth. Meanwhile, China's domestic service sector – the healthcare, education and leisure services that would enhance the quality of life of most Chinese – is stagnant. Beijing's policy is also economically unsustainable. Borrowers in the rest of the world cannot keep getting ever deeper into debt to buy Chinese manufactured goods. If this economic pattern continues, China is going to see its customers go bust.
Some have cautioned against action for fear of diplomatic and economic retaliation. There is an instinctive fear of anything that smacks of protectionism. But the currency wars are already with us. China is engaging in protectionism by other means. And the longer it is allowed to continue doing so, the more painful and disruptive the final reckoning will be.