Europe can buy technology from US and sell it to China to turn threat of currency war into opportunity for recovery

The recent announcement by the US Federal Reserve that it will print more dollars raises fears of an impending currency war. Can the threat of a currency war be transformed into something more benign? Better still, can it stimulate fresh ideas and moves that lead to robust global economic recovery? The answer is yes if we pursue win-win business deals with imagination and goodwill.

Put simply, the proposal is for China and other Asian countries to buy European technologies and assets. With the money, European companies can then buy technologies and assets from elsewhere, including the United States. This will provide a benign environment for growth in the real economy, because it will reduce the global trade imbalance and help the dollar to recover.

At the heart of the issue are US trade deficits and the huge buildup of foreign reserves held by other economies in US dollars.

One obvious solution is for these countries to increase their imports from the US and to buy into US assets.

But what happens if the US restricts sales of goods and assets that foreign companies want to buy?

The US has banned high-tech exports to China and has blocked takeover bids by Chinese companies.

And China is not alone in such matter. A Middle East country was not allowed to buy a port facility. The reason? The US does not consider these countries as friends and therefore does not trust them.

Let us for a moment ignore the question whether it is wise for the US to impose such restrictions. Let us instead ask if there are other ways to solve the problem. Europe has many things that the US has. But unlike the US, there is no unified will to restrict exports of a given technology or to disallow the sale of assets to foreign buyers. This provides a more favorable environment for buyers from Asia.

China, with its vast pool of engineering and scientific expertise, does not always need to buy the most advanced technologies. There are two advantages of not going for the very best - one is the cost advantage, the other is that it faces much less official restrictions on exports. China can then use its technical skills to improve on these no-longer new technologies, as it has done in the case of its high-speed railway.

For their part, the sellers of European technologies can then use the cash to acquire top-end technological assets from the US, where they face less opposition, or even no opposition. Using this approach, we end up with a situation where the trade imbalance between China and the US is reduced.

This is a win-win situation for the whole world. The US economy is given a solid foundation on which to recover and the dollar is strengthened. China no longer needs to worry so much about the shrinking worth of its dollar reserves and Europe benefits in its role as a global trader of technologies.

This approach would also give China access to a vast range of technologies.

In which case, China may wish to consider acquiring more assets in Europe. China did well by investing in port facilities in Greece, which also provided a welcome boost to the Greek economy in a difficult time. In the current situation, there is scope for China to widen and deepen its economic relationships with other Euro countries in trouble.

Moreover, there are long-term benefits of investing in production facilities in European Union member countries in East Europe. While helping to boost the economy and to provide jobs, Chinese companies gain direct access to the European Union market. This is the approach followed by Japan. A few decades ago, in response to the threat of protectionism against Japanese goods, Japanese firms like Toyota relocated some of their manufacturing to the US.

A robust economic recovery of the US economy is in the interests of the world. In this sense, Asia should play a positive role in helping to speed up the recovery. The same remark applies to Europe.

At the same time, Washington should do its part in making the whole process easier for everybody.

Yang Mu is a senior research fellow with East Asian Institute, National University of Singapore. And Heng Siam-Heng is its visiting scholar.

(China Daily 01/08/2011 page5)