Time for a More Equal Economic Partnership Between the U.S. and China?
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In the global economy, China would specialize in making high volume, low cost products in return for high value technology and services from the West. The profit that China makes would be recycled back to the West (especially the U.S.) in the form of loans / credits. Despite the recent global financial crisis, I do not expect this basic pattern to change any time soon.
However, the time for some change may be afoot. For one thing, many economists in the West now seem to be more willing to acknowledge that the Chinese economic growth may be sustainable for the long term. Even the Economist has been showing more confidence and optimism for China as of late.
In a recent article, for example, the Economist reported:
WHEN Deng Xiaoping set China on the road of economic reforms in 1978, Western economists argued that “Only capitalism can save China.” Exactly 30 years later, some pundits are claiming that “Only China can save capitalism.” Most rich economies are now facing recession. But if China, the world’s third-biggest economy, can manage to sustain reasonably robust growth, it will help to cushion global output. A massive stimulus package of 4 trillion yuan (nearly $600 billion) announced by the government on November 9th was therefore widely cheered at home and abroad.
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The eye-popping 4 trillion yuan stimulus package unveiled by China’s State Council this week is to be spent over the next two years. It amounts to 14% of this year’s estimated GDP and, in dollar terms, is four times as big as America’s fiscal stimulus earlier this year. The total increase in spending, if genuine, would surely represent the biggest two-year stimulus (outside wartime) by any government in history.
The package includes public works, social welfare and tax reform. The main spending areas are public housing for poor households; infrastructure projects such as railways, roads, airports and the power grid; speeding up rebuilding after the May earthquake; and increased spending on health and education. A reform of the VAT system will allow firms to deduct purchases of fixed assets, reducing companies’ tax bills by an estimated 120 billion yuan (4% of 2007 industrial profits). This should encourage firms to upgrade their capital equipment. The government also plans to boost rural incomes by raising the minimum purchase price of grain as well as increasing subsidies for farmers, and promises plumper social-security benefits for low-income groups.
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Normally at international meetings China is accused of two things: its economy is too dependent on exports, while domestic spending is too feeble; and the yuan is grossly undervalued. Mr Hu will now be able to argue that China is doing its best to support domestic demand.
Although China’s planned fiscal expansion is still vague, it promises, if it is implemented and it works, to save the economy from a hard landing. And if stronger domestic demand sucks in more imports of raw materials and infrastructure-building machinery, that is the best way China can help the rest of the world.
But despite China’s increasing economic clout and relevance, the relationships between China and the West is still not balanced. As a recent ATimes article pointed out:
[Global r]ecovery requires a great change in direction of capital flows. For the past decade, poor people in the developing world have financed the consumption of rich people in America. America has borrowed nearly $1 trillion a year, mostly from the developing world, and used these funds to import consumer goods and buy homes at low interest rates. The result is a solvency crisis of the American household, which shows up as a solvency crisis for financial institutions. If we reckon the retirement needs of households as a liability, the household sector is as good as bankrupt.
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China’s economic problem is the inverse of America’s: China has achieved fast rates of growth at the expense of huge disparities between the prosperous coast and the backward interior, as well as excessive dependence on foreign markets. China’s policy response to the economic crisis is far more radical than Washington’s. Rather than attempting to patch up the situation and restore the status quo ante, China plans to spend nearly a fifth of its gross domestic product on an internal stimulus focused on infrastructure in its interior. Severe execution risk attends the Chinese proposal, and markets remain to be convinced.
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The trouble in the world economy has been that a rich Chinese won’t lend money to a poor Chinese, unless the poor Chinese first moves to America. China bought American mortgages, including poor-quality assets dressed up as high-quality assets, because China does not have the financial, legal and administrative capacity as well as the trust to write sufficient mortgage business at home. China’s efforts to spend a fifth of its GDP on infrastructure face enormous problems of governance. In the United States, voters most approve most public spending at the local level, and the federal system provides checks and balances against abuse of public funds. Emerging economies must rely on the probity of a small number of officials with enormous power, a far less effective check against corruption.
China can use America’s help in shifting its economy towards the internal market. Ironically, American officials have been trying to persuade China to import the American financial model for years, and the collapse of the American model has made the prospect less attractive. But it is a very good moment for China to bring in American banks, and start up a consumer lending market. The failures of the American consumer market do not wipe out a century of banking experience in evaluating and securitizing consumer loans. To help import the American model, China should be given the opportunity to purchase major American institutions in return. Citicorp, for example, could be bought today for about $50 billion or Capital One for $13 billion.
America remains the most technologically advanced economy in the world. China needs American high technology. In many instances, America restricts the sale of technology to China due to security concerns.
The United States should offer China a general reduction in restrictions on imports of American technology and acquisition of American companies, in return for a treaty linking Chinese and American security interests.
How can China and U.S. develop a more equal relationship? What would a more equal economic relationship look like? What would a more equal political relationship look like?
The authors for the ATimes article above suggested a comprehensive treaty that would include:
1. A system of royalties for technology transfers and guarantees against pirating.
2. Freedom for Chinese companies to acquire American companies, including financial institutions.
3. Agreement on a common stance towards rogue states, nuclear arms proliferation, terrorism and other issues of mutual concern, covering such issues as Pakistan, Sudan, Iran and other areas of past diplomatic conflict.
4. An agreement on strategic arms deployment in Asia.
5. A roadmap for China’s democratization.
6. Environmental and energy-efficiency goals.
7. Stabilization of China’s yuan against the dollar to support free capital flows between the US and China.
What do people think?
Personally, I think most of these look relevant and fair enough, but #4 seems kind of ambiguous, and# 5 seems downright condescending of China’s current political legitimacy.
I’d be interested in everyone’s thoughts.
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November 16th, 2008 at 11:41 am
Isn’t #3 and #5 linked?
As for 5, I don’t think Chinese political thinkers would necessarily agree, depending on how the word “democracy” is interpreted. Even the most conservative forces within the party agrees that some sort of democratization or “reform” is needed, including such factors as rule of law, good governance and more political participation.
Something I would like to know if there’s a historical difference between China and the other countries of the world, or if most countries have followed the same path. Japan mostly did cheap copies in the 50s, and toiled for at least 20-30 years before it began having its own industry. Toyota wasn’t a leader even 10 years ago, but look at what it is today. China has a large computer brand, Lenovo, and has begun to sell cars in Europe. Isn’t it just economic commonsense?
(I hope I’m not triviliazing the problem discussed here. I certainly think there are problems in the relations between developed and developing countries, and China puts a finger on it. There are political factors in there too that might make the Chinese case special, especially restrictions put forth by the American side)
November 16th, 2008 at 7:56 pm
@Wukailong
You wrote
I think it’s a normal pattern for developing countries to move up the global economic value chain. However, China is unique in the fact that the U.S. still considers China a strategic rival in many sense. The U.S. has many export restrictions for China on technologies with dual civilian and military use (that covers a lot of things). That restriction distorts the trade imbalance even more – by prohibiting U.S. companies to trade with China many things that China needs…
As for whether #3 and #5 are linked, I don’t think they are linked. One is about geopolitics, the other about domestic political reform. (Am I missing something?)
November 16th, 2008 at 9:50 pm
I posted the following before and it is quite related here.
US and China should sleep together and they make perfect partner. One has low-cost manufacture products (for now) and the other has high-tech products and agricultural products. A marriage in heaven!
However, as in any marriage, they need to improve their relationship: trade restriction, different yardsticks in human right, blame game…
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Yes, China should fund US finance as without US’s help (and its influences on the West) in last 30 years, China will not be today. US’s FDI (investment) and opening the market is the most important pillar to China’s success. The other pillars are building infrastructures in coastal/special areas and governance. India lacks all 3 and that’s why they are behind. The other argument is you do not want to kill the goose that lays golden eggs.
No. It is like opium, the more money they take the more they spend on stuffs they do not need; an addict seldom recovers. China’s past investments including almost 1/3 of the treasury bill yield bad returns. Some big investments last year lose over 50%. China does not have the financial skills to evaluate foreign investment. In most yardsticks, they’ve over-paid at the time of the investment.
Tasks China should do. US companies are still rich in technology and management (not all). Bail out or buy the companies that will help China to move from low-cost consumer products to high tech products. Negotiate with US to buy certain technologies that currently are restricted to China. Evaluate buy/build options as plenty of bargains in US. To illustrate, many locations of some failed banks around the world are great buys and they’ll never be available when economy returns. Negotiate good prices to buy farm products for next several years.
With the shrinking market from US and the west for the next two years at least, they still have to improve the infrastructure to reduce social unrest even the return is less than before. Buy and stock pile minerals and oil. Invest in pollution controls… 8% growth is the goal.
November 16th, 2008 at 11:35 pm
I think it would be fantastic if the US and China came to an agreement on the issues mentioned in the article. Unfortunately, with a couple exceptions, I think any agreement would be impossible on most of those issues.
1. A system of royalties for technology transfers and guarantees against pirating.
The problem here is that China has already signed onto agreements to combat piracy (not least of whcih being the WTO). It’s a matter of enforcement. I’m not really familiar with what’s been done so far or what needs to be done in the future, but I suspect the issue is mostly on the Chinese side: that is, the piracy is being caused in China mostly for Chinese consumers, and the US can’t really do much about it except raise objections to the Chinese government, which it frequently does.
2. Freedom for Chinese companies to acquire American companies, including financial institutions.
This is a thorny issue in the US because China has been regarded with suspicion for so long. The US reacted negatively in the 1980s when Japan invested heavily in US properties, but even then Japan was a US ally and had no serious ambition to replace the US militarily in Asia (at least, none that was plausibly realizable). Most Americans fear that China’s intentions are to do just that. And since it’s around 10x the size of Japan population-wise, they are far more fearsome to the average American. The fact that the leadership is “Communist” ignites the old Cold War-era mentality, further exacerbating the problem. In short, while I think there’s nothing per se wrong with Chinese companies investing in the US, many (if not most) of my fellow Americans would probably disagree.
3. Agreement on a common stance towards rogue states, nuclear arms proliferation, terrorism and other issues of mutual concern, covering such issues as Pakistan, Sudan, Iran and other areas of past diplomatic conflict.
The problem with this is that China has close and mutually beneficial ties with Sudan, Iran, North Korea, and other American foes. I don’t see what the US can offer China in exchange for its adjustment of ties with any of these nations. The War on Terror is still going on, and it’s unlikely an Obama administration would seek to adjust America’s containment/intervention policy toward these states so drastically as to allow for a total readjustment of its own stances toward these nations. Such a reevaluation may also come off as illegitimate to the American people if done as part of an exchange with the Chinese. The only agreement the US and China could hope for is one restating some vague commitment to peace around the world.
4. An agreement on strategic arms deployment in Asia.
As I alluded to above, China and the US have little common ground when it comes to each nation’s vision of the military future of East Asia. The Chinese are intent on becoming the predominant power in the region, and the US is intent on maintaining its predominance. Any concession made by either government would be viewed by that government’s constituents as a sign of weakness. As for me, I think its unrealistic for the US to see itself as the preeminent force in Asia indefinitely, but a pullback of US forces in order to make room for Chinese forces would be political suicide for the Obama administration, absent some major shift in American public opinion toward isolationism (not an impossible scenario, but unlikely in the next 4 years). In other words, don’t expect to see much change in this area either.
5. A roadmap for China’s democratization.
Obviously a non-starter; I don’t think I need to elaborate why.
6. Environmental and energy-efficiency goals.
This could be one area where progress could really be made. I think the leaders of both countries are eager to demonstrate their commitments to environmental reforms. The Obama administration wants to attain energy independence and combat global warming, and an agreement with the Chinese could yield some valuable political capital. The Chinese leadership is also likely eager to recast itself as a promoter of environmental protection. China would also get material benefits from a US-China environmental pact, as the environmental situation in China is likely costing the country billions of dollars yearly and is the source of popular unrest. American “green” tech companies may be able to score some contracts with Chinese manufacturers and power companies.
7. Stabilization of China’s yuan against the dollar to support free capital flows between the US and China.
I don’t know nearly enough about economics to touch this issue.
My two cents. Can’t wait to read what others think!
November 17th, 2008 at 2:55 pm
Hi WillF.
I agree with most you say. Just add my thoughts.
1. Not all pirating are bad to US only. It hurts China too. Who wants to create a pop song when every one can copy next day without paying? However, should we let folks in poor countries die when they cannot afford expensive drugs from the west? If one can make a easy buck like copying DVDs or designers’ hand bags easily, they will be pirated. It is hard to enforce.
2. & 3. China and US have strange relationship, neither friend nor foe. US played China card against Russia.
US only sells China high tech stuffs that can be dual used, if China has similar technology. Computers are in gray area. China builds computers in world top 100 by linking hundreds of Intel chips together. Intel chips are OK to import to China. Once China has the capacity to provide that speed, in theory China can import super computers.
3. I suspect China helped these rogue states in missile technology, while the precious hand-on experience/technology was from US in the 50-60 (forgot the exact time) during the stupid US witch hunt.
4. Why US has to be the world police with its carriers that are more powerful than most Asian countries?
6. Have been done to certain extend. I bet most of the environmental friendly coal generators are from US. It is also the enforcement – some treatments are not turned on.
7. The yuan should be appreciated by at least 15%. It would not be good for export for China and hence jobs. Beside this, most countries want their currencies to appreciate.
November 17th, 2008 at 4:13 pm
First: I’ve never understood the pirate question as something international, or China as a main culprit. When I grew up we played a lot of computer games, and almost all of them were pirated (back in the C64 days). Nobody found this strange. I think it was in my teens that I finally understood it was considered illegal, but my brothers and friends didn’t care an inch. When you’re not rich enough to spend a lot on games or movies and it’s easy to copy, you’ll have this situation.
The reason I wanted to mark 3 and 5 together is because the US, projecting itself as democratic, is a natural enemy of countries like Sudan and North Korea. That makes them interesting to China, but democratization in China would change the game board and make it less prone to come to their support. These things are more about geopolitical issues than real concern about democracy, though.
November 17th, 2008 at 6:22 pm
@ Wukailong: I agree that piracy is not unique to China. Look at the popularity of Napster and subsequent file-sharing software in the US. It’s a complicated issue. Still, it’s undeniable that pirated products are everywhere in China, and that causes various problems: disincentives for domestic and foreign IP producers to invest in the Chinese market, huge quality control issues, etc.
As for the linkage of 3 and 5, I agree that the Chinese government’s non-democratic nature is a barrier to aligning US and Chinese interests, but it’s not the only one, and I don’t think it’s even the biggest one. The Chinese government is very hostile to the idea that foreign interference in a country’s domestic affairs is ever legitimate, and this is only partly due to the fact that the government is non-democratic, while the main proponents of intervention (the US, the UK, the EU to an extent) tend to imply that non-democratic governments are illegitimate. There is still a smoldering resentment in China toward the West that dates back to the imperialism of the 19th century. But I think the largest issue is that China won’t receive any tangible gains from joining the ranks of interventionists, other than praise from the West. However, China is currently receiving tangible benefits from its current policy, such as oil, raw materials, and cash. Unless China’s support of these regimes becomes more of a burden than an asset to China, we’ll see a continuation of the same policies regardless of the nature of the Chinese government.
That being said, if government officials became dependent on voter support in China, and Chinese public opinion turned against the government’s association with unsavory regimes, then the government would have a serious incentive to discontinue its policies and maybe even align with the West. But I don’t think the Chinese people harbor the same fervent disgust for the autocracies in Iran, North Korea, etc. that the West does, or at least do not believe that the Western model is so obviously superior as to grant the West the unquestionable moral high ground.