Assuming we are on our way to a resolution of the China currency dispute, what caused the situation to improve so rapidly, when not long ago the rhetoric was getting quite heated? Dan Drezner sets out some possibilities, along with his view:
If China's shift is a real one, there appear to be three possible sources of change:
1) Domestic factors and actors convinced China's leadership that diminishing marginal returns for keeping the yuan fixed and masively undervalued had kicked in;
2) China responded to mounting multilateral pressure and feared being isolated at the upcoming G-20 meetings.
3) China responded to threats of unilateral U.S. action, such as being named as a currency manipulator, and/or calls for a trade war;
These are not mutually exclusive arguments, and we might never know exactly what caused China's [change]. But for the record, I think (1) and (2) mattered a hell of a lot more than (3). That said, I can't rule out the possiblity that their antics helped scare China into action.
Thus, Drezner's view seems to be that the more strident unilateral approach of people such as Chuck Schumer and Paul Krugman was probably not the main reason for the recent positive developments. That sounds reasonable and may be right. Nevertheless, I wonder if this piece from the Economist offers some insights:
Mr Geithner also tried to shift the terms of the debate away from bilateral threats, by making clear that forthcoming multilateral meetings, especially those of the G20, are the right places to discuss China’s currency. And his willingness to stand up to domestic political pressure (130 congressmen had sent him a letter demanding immediate action), set a good example to policymakers in Beijing.
Note the part about Geithner's "willingness to stand up to domestic political pressure (130 congressmen had sent him a letter demanding immediate action)". I wonder if this was a kind of "good cop, bad cop" exercise, in which the Krugmans and Schumers (the bad cops) of the world argue strenuously for strong unilateral action; then, the good cop (Geithner) can step in and reassure everyone that 25% tariffs, etc., will never happen, and that cooler heads will prevail as long as China shows some progress. All along, Schumer and Krugman knew they were playing this role; that their proposals would not be followed; and that by making these demands they were setting the stage for a more moderate solution. Somebody had to play that role, and they were happy to be the ones to do it.
On the other hand, maybe I'm reading way too much into all of this. Perhaps they were simply arguing for what they thought was needed, and it was just that the moderate view won out.
