London, United Kingdom (PressExposure) October 18, 2010 -- In the run-up to the invasion of Iraq, the United States arguably gave only scant regard to calls for restraint from the international community. At the time, it was said that multi-lateral, UN-endorsed diplomatic discourse backed by the threat of yet more sanctions represented the best course of action to deal with allegations that Saddam Hussein had failed to dismantle programs aimed at developing weapons of mass destruction. The rest, as we know, is history but, fast-forward to 2010, and once more, the US finds itself in a position where decisions it makes in the short-term could have serious ramifications both for it and the rest of the world.
This time around, it is the financial and growing economic might of China that America seeks to tame. With Iraq, the US knew that defeat was highly unlikely given the clear superiority of its military machine but, here, victory against China and its foreign currency reserves that are estimated at the equivalent of $2 trillion is considerably less assured.
A "Guardian-Inter.com" analyst said, "Washington is seeking allies - especially among the emerging economies seeing as they too are experiencing loss of competitiveness as China suppresses the value of its currency the yuan or renminbi thereby making its exported goods cheaper than theirs".
It is understandable that the US would seek a confrontation as part of a multi-lateral effort since, if it were to go toe-to-toe with Beijing, its complaints could be viewed as rather self-serving given China is still lending it money by continuing to purchase US Treasury bonds. "The US regards it in the same way as would a man paying interest on a loan to a lender who won't let him go to work every day to earn a wage", said the "Guardian-Inter.com" analyst.
The only problem here is that many emerging nations, particularly those in Asia, have been quite content to dip into the foreign exchange markets when warranted to keep their currencies competitive since many of them have considerable foreign currency reserves of their own with which to play. Additionally, many of these nations count China as their biggest trading partner and actively settle trade in renminbi rather than US dollars.
"Although Germany and France claim to be on board, America can't really count on reliable support from Europe because the EU only complains when the euro strengthens as it is currently doing. If it weakens again, there'll be little pressure brought to bear from Brussels. The best course of action for the US is to continue weakening the dollar in the FX markets and with quantitative easing. It's far from ideal a solution but it prevents an all-out currency war in which, frankly, America has nowhere near enough advantage over China as it did militarily with Iraq", said the "Guardian-Inter.com" analyst.