Fans of Beatrix Potter will know the Tale of Pigling Bland and, like all the best stories for children, it operates on several levels with an underlying horror that occasionally peeks above the surface. I am reminded of it because Britain has just struck a porcine trade deal with China.
Part of a U.K. trade mission to the People's Republic, a British pig-breeder is sending a few prize breeding boars to China with the intention of siring thousands of piglets and bringing home profits, if not bacon, to Britain. Pig semen is not as glamorous as the Rolls-Royce jet engine deal signed on Tuesday, but China has the world's largest pig population and the U.K. government is determined to reduce its £17-billion ($27.5-billion) trade deficit with China.
More trade and freed-up markets is the right solution to global imbalances, rather than the jiggery-pokery of Washington's proposed regulation of currrent accounts. It is the line being pushed by Angela Merkel, the German chancellor, in an interview published in the Financial Times on Tuesday. Ms. Merkel is less critical of the U.S. than was her finance minister, Wolfgang Schauble, who on Monday accused America of living on borrowed money for too long.
Ms. Merkel said the greatest danger for the world was protectionism and she called on America to complete the Doha round of trade talks. China must be persuaded to set a "fair exchange rate" for the Chinese currency and underlying her remarks is the suggested deal - a new trade deal that would benefit China in exchange for a fair value for the yuan.
Ms. Merkel's line is sensible but we should be careful what we wish for when we ask China to put its currency on the market. China is already a huge economic power but it has so far eschewed using its economic clout to political effect. The reason is in part China's innate conservatism, self-doubt and insecurity.
A more powerful currency might begin to change such attitudes. It would encourage China to venture further afield as a more valuable yuan would for the Chinese make such foreign excursions much cheaper. A strong yuan would allow China to buy more abroad, commodities obviously, and in due course it would make foreign assets, including Canadian and British companies, much cheaper to Chinese buyers.
Going to market is a risky business as Pigling Bland discovers when his mother sends him off to town because she can no longer cope with so many children. He escapes the clutches of a farmer who wants to turn him into bacon and he falls in love with a charming sow, Pig-Wig. The pair decide not to go to market and they run away to set up house and grow potatoes. The horrible unspoken truth is that Pigling Bland's mother was sending him to market to be sold and butchered.
Contrary to popular belief, Beatrix Potter was not a sentimental writer and we should not be sentimental about markets. Markets, in the end, are ususally right and because they are right, their judgment is brutal. The yuan will rise - it is already doing so, up about 3 per cent since the dollar peg was weakened. That will help America and Europe, but we must accept the political and economic consequences of a strong yuan. It will mean more, not less Chinese influence in the world and that adjustment could prove to be more problematic than trade deficits.