Time for a More Equal Economic Partnership Between the U.S. and China?
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.
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.
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.
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.
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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