Obama's China Challenge

Rogue Nation: How Does the U.S. Deal With China?

Robert Borosage — Wed, 10 Feb 2010 21:45:03 -0500

China has surpassed Germany as the world's largest exporter. It is the largest holder of American Treasury bonds, nearly $800 billion. America runs its largest trade deficit by far with China. The low-price flood of goods—the Wal-Mart trade—is pervasive. Now the U.S. even runs a growing deficit in advanced technology products.

China flouts the rules and the spirit of the "free trade" global economic order that the U.S. constructed and, under former president Bill Clinton, invited China to join, granting both permanent normal trading relations and membership in the World Trade Organization.

China is a mercantilist nation, largely copying the successful Asian model developed by the Japanese and the Asian tigers. Its communist dictators plan and guide an economy geared to develop through exports. The elements of its model are clear, evident to all who would see, and not often admitted. They include:

An artificially undervalued currency, pegged to the dollar;
An industrial policy that targets "pillar industries," using a broad range of subsidies and protections to capture of world markets;
A complicated maze of trade barriers that allows systematic pressure on foreign multinationals to invest for export in China and to transfer their most advanced production techniques to China;
Systematic efforts to pirate technology, trade secrets and copyrighted materials;
A system of forced savings that funds investment.

In the global economy, China is a rogue nation—with success that breeds envy and imitation. Its system works very well for China, but not for the rest of the world, as respected commentators like Martin Wolf of the Financial Times have pointed out. As the IMF warned, the dramatic trade imbalances run by China as a mercantilist nation and the U.S. as the consumer of last resort are destabilizing and unsustainable—and contributed directly to the financial bubble and bust that drove the world into the Great Recession.

This poses a central problem. What do you do when the most successful nation in a trade regime routinely and systematically violates that regime?

You can deny reality. This has been a favored response of the China lobby, arguing that China is really far more open and free market than Japan and other East Asian countries, or trumpeting preposterously that the "World is Flat," and there are no alternatives to the Washington consensus.

You can argue that the situation is improving. Successive administrations have claimed that the Chinese will inevitably become more democratic and more free as the economy grows, that the Chinese government has agreed to crack down on piracy, to curb its internal systems of bribes and controls, to let its currency adjust, to increase domestic demand and decrease forced savings. But after 20 years, the routine gets a bit tired. .

You can argue that the situation doesn't matter. This is the favorite trope of the U.S. foreign policy elite. (See most recently, Fareed Zakaria) China and the U.S. have a symbiotic relationship, we're told. They have to keep the dollar strong and cover our deficits. So we benefit by buying more than we produce and getting a flood of cheap products; they benefit by producing more than they buy.

But this too is hard to swallow after twenty years. The imbalances contributed directly to the financial casino that Wall Street opened -- while U.S. workers saw their jobs shipped abroad, their wages fall, and their prospects dim.

The Obama administration, not surprisingly, has tip-toed around this question. Obama led the drive to get the G-20, including China, to set up a process to monitor—and highlight—excessive trade imbalances. Unlike Bush, Obama accepted the decision of the U.S. Trade Commission in cases concerning Chinese dumping or flooding of our markets. But as under Bush, the Obama Treasury Department ducked calling things by their real name, refusing to certify that China was doing what everyone understands it is doing—manipulating its currency to keep it undervalued.

Now, as the world starts to turn its attention to recovery—however prematurely—the question remains. How will the U.S. handle a rogue nation with policies that are destabilizing for the globe, and ruinous for the American middle class?

At the end of the day, the U.S. will have to have an aggressive trade policy to challenge Chinese mercantilism and a smart industrial policy to revive advanced U.S. manufacturing. We know how to do it—to target a key industry with public supported research and development, smart procurement, planning to build supply chains, subsidies for investment here.

The president rightly says that capturing a lead in the new green industrial revolution is a matter of our nation's basic economic security. Well, consider the way we deal with national security when it comes to the military. There's no parading about free trade. No conservative blather about small government, or getting government out of the way. Here's how the Pentagon's recently published 2010 Quadrennial Defense Review described the Pentagon's industrial policy:

America's security and prosperity are increasing linked with the health of our technology and industrial bases. In order to maintain our strategic advantage well into the future, the Department requires a consistent, realistic, and long-term strategy for shaping the structure and capabilities of the defense technology and industrial bases--a strategy that better accounts for the rapid evolution of commercial technology, as well as the unique requirements of ongoing conflicts.

That strategy includes export controls, procurement policy, and "a strategic approach to climate and energy."

China has made new energy a "pillar industry." It has deployed the entire range of its mercantilist strategies to make itself the leading manufacturing of solar panels.

If capturing a leading edge of these industries is vital to our nation's economic security, then shouldn't we get serious about an industrial policy that goes far beyond the Pentagon?

China: Smart Intern, Stupid Question

Eric Lotke — Mon, 23 Nov 2009 13:56:08 -0500

A really smart student intern I’ve had the privilege of working with (Jonathan Flack, GWU 2010) asked a really stupid question. “Why,” he asked, “Do we give China everything it wants? Why don’t we challenge them?”

This intern knows what’s going on. He knows about our $2 trillion trade deficit, the manipulation of the Yuan, and dumping of steel pipes in the US markets. Of course, he also knows about human rights and Tibet. But most importantly, he knows that economically China is eating our lunch.

He wants to know why our government doesn’t do something about it. He wants to know why we don’t take them on, rather than giving them the Olympics.

It didn’t take long for him to understand the answer. China isn’t the only winner in this U.S. trade imbalance. US corporations win big too.

-- Nike opens up sweat shops, makes sneakers in China for cheap, and sells them in America for $90 a pair. Who wins? Nike.

-- Nortel and Sun help China develop web censoring equipment. Who’s it good for? Nortel and Sun.

Our approach to China sadly indicates whose side our government is really on. The people need change. Big Business likes the status quo. The Obama administration is wrestling with priorities. Even my intern sees who’s losing.

————
PS: What if we don’t change the status quo? Check out my novel, 2044. 2044 starts where George Orwell’s 1984 left off. The problem isn’t Big Brother; it's Big Brother, Inc.

Beyond Obama's China Trip: Facing The Economic Dragon

OurFuture.org Staff — Thu, 19 Nov 2009 15:30:38 -0500

On the heels of President Obama's trip to China, Carolyn Bartholomew, the chair of the U.S.-China Economic and Security Review Commission, and Clyde Prestowitz, the president of the Economic Strategy Institute, discuss how the United States should respond to the Chinese economic juggernaut.

Bartholomew and Prestowitz agree that the United States needs to respond to the Chinese government's efforts to boost their economy with our own "innovation strategy" that supports the strengthening of industries key to our energy and technology future. That strategy would include national incentives to businesses that would supplement, if not replace, the piecemeal efforts by states to woo foreign companies or keep domestic companies from leaving. They suggest that, contrary to the insistence of some doctrinaire free-marketeers, there are some steps that China is taking to build up its economy that we should emulate, and our bilateral negotiations should reflect that truth.

They also explain the importance of Chinese currency policy in constraining our own ability to grow our economy.

Obama’s Home And The Report Is Out: China Takes Us To School

Eric Lotke — Thu, 19 Nov 2009 11:04:38 -0500

President Obama is home from China and the U.S.-China Economic and Security Review Commission today releases its 2009 report to Congress. What have we learned? That we need to pay attention because we’re getting schooled.

While Obama posed for photos on the Great Wall and talked about a relationship “at an all-time high," China continues to take our lunch money. Hopefully, there were serious back-room negotiations over currency manipulation and illegal subsidies … because if not, we’re in trouble.

Don’t take my word for it. The official, bipartisan China commission held hearings, traveled to China and received closed briefings on classified information. They reported back about expansion of the Chinese navy, China’s stepped-up espionage and cyber-warfare capabilities, and the world’s most sophisticated web filtering and Internet control systems.

But the economy is behind it all. China is quite literally eating our lunch. Since 1980, the U.S. has accumulated a trade deficit with China of nearly $2 trillion. The biggest piece of this trade deficit is in manufactured goods, once the wellspring of American prosperity. And a big piece of that comes from China subsidizing industries and manipulating currency in a way that gives their exports a competitive edge. China then takes our money and lends it back to us, creating both national indebtedness and a destabilizing excess of liquidity that helped fuel our asset bubbles.

This year's report reflects the commission's concern that despite its accomplishments and growing sense of confidence, China may be moving in the wrong direction and that this affects the U.S.-China relationship. China has yet to embrace the challenge first issued in 2005 by the United States that it become a "responsible stakeholder" in world affairs (p. 15).

The report reads like an indictment of Chinese behavior and American compliance. The most glaring problem is the subsidies.

China continues to employ a wide range of subsidies to favored companies and industries within China and to control the value of its currency and provide massive loans from state-owned banks to industries producing over capacity. This approach gives Chinese exporters a substantial price advantage in international markets and disadvantages U.S. companies hoping to export to China.(p. 15).

The report itemizes subsidies in the form of land grants, discounted electricity, and loans from state banks at below market interest rates or “without expectation of repayment” (p. 59). As a whole, the commission concludes that the subsidies and special treatment of Chinese-owned companies “violate China’s obligations as a member of the World Trade Organization” (p. 59).

The report goes on to describe export restrictions (p. 62), currency manipulation (p. 68), double-standards on domestic content (p. 52, 64) and China’s failure to enforce its laws on forced labor, child labor and environmental standards (p. 67) that were key to gaining international investment and foreign government support. The findings go far to explain why products made in China are so much cheaper than products made in America, and the incentives behind our gargantuan and growing imbalance in trade.

The report also explains how the imbalance goes beyond the trade in goods, and helped bring the whole system down. The commission places responsibility for the global economic meltdown “partially on the United States as the world's biggest spender and borrower and partially on China as the world's biggest saver and lender.” But it’s not because Chinese are inherently parsimonious or frugal. “China pursues policies that have the effect of increasing Chinese savings, restraining consumption, and keeping the RMB (renminbi) undervalued” (p. 3). The saving was as out of balance as the spending.

The imbalance extends all the way to the banks. China had hundreds of billions of American dollars, and needed something to do with them all, so they lent them back to us. “The policies that China adopted generated a huge flow of liquidity —or money that can be easily lent to borrowers — into U.S. markets. This excess liquidity created perverse incentives in the United States that encouraged banks to make risky loans to U.S. households, which in turn grew ever more indebted. High U.S. demand for imports allowed China to save even more, creating a vicious cycle and laying the foundation for the current crisis” (p. 4).

So it collapsed. The unstable structure tumbled down.

In the aftermath, the U.S. passed its own Recovery Act and led efforts for international collaboration. But what did China do? More of the same. The commission reports that China stimulated its economy by raising rebates to exporters and offering other advantages to see manufacturers through the downturn (p. 40). In the words of the Commission:

The fact that the government in Beijing is still pursuing an export-led strategy based on a wide variety of subsidies to export industries, including an RMB that remains substantially undervalued, is a cause for concern. If China continues to pursue huge trade and investment surpluses and to accumulate vast financial claims, it will hinder the necessary global economic adjustment, create excess manufacturing capacity, and lay the groundwork for the next crisis.” (p. 2)

We don’t need to watch it fall apart all over again. Cheap Chinese exports to distressed U.S. consumers are not the answer. The report advances 42 specific recommendations, from responding to currency manipulation to increasing our defenses against cyber-espionage. A crucial minimum is aggressive use of World Trade Organization trade remedies. We’ve started moving in that direction with cases on tires and steel pipes. The Commission recommends that the U.S. government preserve and use existing remedy laws “to respond to China's unfair or predatory trade activities” (p. 12).

Obviously, nobody wants to start a trade war and nobody thinks we can unwind the global economy. This isn't about protectionism or going backwards. It’s about building a global economy with agreed-upon rules of free trade that every country follows. From rugby to poker, rules make systems work. Following rules is what China agreed to when it entered the G-20 and was granted permanent normal trade relations with the U.S.

♦ ♦ ♦

There’s a purely domestic angle, too. Between the lines of criticism is a hidden story, implicit advice about fixing our own economy. Parts were illegal and parts were unfair, but China’s success shows how deliberate industrial policy helped it accomplish strategic goals. Indeed, a summary of China’s misdeeds reads almost like a “how-to” list for industrial policy: Subsidize strategic industries, especially energy (p. 57, 65). Enhance innovation by creating “industrial commons,” clusters of producers, suppliers and researchers in close proximity who support each other in uncovering problems and discovering solutions (p. 87). Build an infrastructure, especially on transportation, with domestically produced parts (p. 64).

Now the U.S. can’t be like China in every regard, and we wouldn’t want to be. But we might as well learn some lessons while we’re in school. As the Commission observes, “A widely shared goal in China is to make the country rich and powerful and to regain the nation’s former status as a great power that controls its own fate” (p. 56).

That’s their goal and they made a plan to achieve it. What’s our goal? How are we going to get there?

Obama's Asian Angst

Scott Paul — Wed, 18 Nov 2009 10:07:34 -0500

I like that President Obama accords his Asian peers with respect, bowing if tradition calls for it, even though it raises the hackles of some wingnuts. But bowing to the wishes of China is another matter altogether. I'm completely underwhelmed with the results of the President's trip to China, especially with so much at stake. And I write this as someone who has had very high hopes for this administration and its fresh approach to trade policy with China in particular.

U.S.-China relations are at "an all-time high" only if the administration is referring to the levels of our bilateral trade deficit and debt financing. On every issue—exchange rates, market access, and even the terms of the broadcast of the town hall meeting—the president was outmaneuvered by a Chinese government that is growing in confidence every day.

A CNN poll released this week revealed that more than 70 percent of Americans believe that China is a serious economic threat. I believe the administration understands what is at stake, but politely and deferentially asking China to make changes is not likely to result in much success.

Most media analysis of the U.S.-China economic relationship has focused on our dependence on China for debt financing. It's true, but we do have other options. China, on the other hand, doesn't have an alternative to America's rich consumer market for its goods. America has much more leverage than most pundits think. And we can wield it without igniting a tit-for-tat trade war.

China, I believe, wants to be treated with the dignity and respect of a rising economic power. The Obama administration should have made clear exactly how that could have been accomplished: playing by the rules of global trade, achieving balance in its current account, and taking steps to ensure that more Chinese are able to share in the country's prosperity.

American voters have a visceral response to jobs shipped overseas, a trend that Obama said he would address as a candidate. Less than a year out from the midterm elections, this looms as a major political problem, as well as an economic one.

Changing The U.S.-Asia Trade Relationship

Natasha Chart — Sat, 14 Nov 2009 01:24:30 -0500

President Obama said Saturday in Tokyo, Friday in the US, that "One of the important lessons this recession has taught us is the limits of depending primarily on American consumers and Asian exports to drive growth."

It seems, with his willingness to call China to account for dumping, and as concise an explanation as that of the problems with the US-Asia trade relationship, Obama understands that things have to change. One of those things is that Americans need to work more at being producers. Ideally, the Chinese will become consumers of our goods also, hopefully for good reasons like increased prosperity.

So when Obama also said that a prosperous China would be a "source of strength" for the world, I think that's right. If China has a prosperous middle class, well-treated workers, a clean environment, good relationships with other countries, it's hard to see the problem.

That's not the case right now, though.

I've written previously about how Chinese export restrictions on raw materials, like the rare earth minerals needed to make windmills, affect manufacturing in other countries where those materials are either scarce or too expensive to produce. Now, having created a dependency for supplies like coke, China's expanding their raw materials export fees and restrictions in the name of reducing their greenhouse gas emissions.

It's hard to fault them for wanting to reduce their emissions footprint, I'd certainly consider that important. Coke, for example, is coal processed at extremely high temperatures in ways that often produce human-toxic, cancer-causing compounds, as well as gas emissions that contribute to global warming.

Yet in the context of previous actions, it would be hard not to suspect that this was just a new excuse to keep raw materials access artificially cheap on behalf of their own producers. I don't have much in the way of answers regarding what to do about that, but I do have ideas.

What I'd like to see as a response in this case is an expanded commitment to research and development of coke-less production of steel, because coal is something I believe we should be leaving in the ground. Or if we're going to finally get an industrial strategy, let's have one that encourages US and Chinese manufacturers to follow good pollution control guidelines, by leveling the playing field for good actors - there's no one in the world that deserves to live next to, or work in, a smelter that's belching out benzene, benzopyrene and cyanide for them to breathe and drink.

As human beings, we owe each other investments in clean manufacturing processes that allow all our families to live in good health. That's achievable if our international relations are equitable and negotiated with the aim of improving everyone's welfare.

Listening to Leo Gerard from the United Steelworkers and John Surma of US Steel Corporation talk two weeks ago, they seemed proud of the advances they've made in clean manufacturing and the production of new types of steel. If they had a government and investment climate that was supportive of the direction they're going, I think they'd jump at the chance to respond to the challenges posed by restrictions on highly polluting materials.

One of the major challenges in getting a climate agreement through the US Congress is the same challenge in getting one through the international climate conference in Copenhagen. There are many major industrial sectors with enough political clout to kill good agreements, but either not enough to get protection through a retooling process or a lack of will to ask for the help to change.

Though long term, there's no benefit to be had from pitting groups of people against each other in competitions that even the winners will eventually regret.

The rate of change we've all seen in our lifetimes sometimes boggles the imagination, it's hard to process. I know my grandmother couldn't get used to it. By the time she'd gotten to her seventies, she already disliked almost everything she saw about the modern world. (Except Costco. She was a big fan.) I never blamed her for it, I think it just made her feel lonely and so it was hard to fault. But for anyone who doesn't want to retire from the world and fade out, it's important to find a way to handle living in a world where even a 34 year old internet user like myself often feels behind the curve of technology and current events.

Things are going to change even more in the future. The status quo isn't an option. If we don't take our destiny in our hands and try to make it better for everyone given the resources we have, then what we'll get is an ever more painful decline. That just doesn't sound like any fun.

Chinese Currency Deflation In Perspective

Natasha Chart — Fri, 13 Nov 2009 23:09:39 -0500

China's artificial currency peg has come to be a problem for many world economies, including neighboring countries in Asia, many of whom now trade more with China than with the US. It has become a threat to the global economy, mainly because of this number: 17.3 percent.

That was China's share of the world's manufacturing output as I calculated it from 2008 United Nations figures. So, close to a fifth of everything made in the world is made in China. (Which also happens to be very close to the US percentage of 17.7 percent, so it's quite clear why they have so much impact.) They're one of the few industrial nations with a positive balance of trade, and it's no surprise, the world is a seller's market for them.

When it comes to trade with the US, we've further disadvantaged ourselves by putting all our tax burden on exports, rather than imports, a practice unique among the wealthy and industrialized nations of the world. And our environmental and workplace protection standards aren't to blame; Germany has far stricter regulations than the US does on both counts and they, also, have a positive balance of trade.

The issue now is that there's very little leverage to convince China to play by others' rules. The US has the most equivalent leverage; while the Chinese government is a significant US creditor, they also can't really afford to either lose our consumer market or have our economy collapse to the point of default. Yet the US has both decreased its economic power and political clout by allowing its own middle class to be whittled down, and letting its finance sector treat interactions with the world economy like a night at the high roller table in a Caesar's Palace casino.

The US and China are stuck in this together. If one goes down, so does the other. To a larger extent, the world economy also needs both countries to have healthy economic systems. Interdependence through trade would make wrenching change inevitable throughout the globe should a major exporting nation become insolvent.

Getting China, and the US, to deal with the way their trade and business practices contribute to instability, will be the deciding factor in whether or not coming decades are prosperous for much of anyone.

Back To Our Old Ways On Trade?

Dave Johnson — Fri, 13 Nov 2009 10:47:25 -0500

This just in from Reuters: U.S. trade deficit widened in September.

The U.S. trade deficit widened in September by an unexpectedly large 18.2 percent, the most in more than 10 years, as oil prices rose for the seventh straight month and imports from China bounded higher, a U.S. government report showed on Friday.

The gap in September was $36.4 billion.

In other words, we borrowed more money to buy things made elsewhere. We did that because a few decades ago we started exporting our manufacturing capacity. So now our trade profile looks like this: We export jobs and factories. Then we borrow money to buy more of the things we consume. Borrow, consume, borrow, consume.

How long with this unsustainable situation be able to continue this time? We know what happened last time. So our policy should not be it didn't work so we are doing more of it. We as a country should be capable of learning something.

And look what we exported:

The value of U.S. exports of industrial supplies, such as steelmaking material and gold, rose to $27.13 billion in September.

A big chunk of what we exported was materials for manufacturing things elsewhere!

President Obama is in Asia starting today, visiting Japan, Singapore,South Korea and China. China is the big one, of course, because of our balance of trade problem with that country. One subject of the discussions will be a word that is going to be heard a lot in coming months and years: rebalancing.

Yesterday in his post What Chinese Currency Manipulation Looks Like, Eric Lotke wrote about the problem of China keeping its currency artificially "pegged" to the U.S. dollar,

China’s deliberate policy of pegging the Yuan to the dollar makes American imports of Chinese goods artificially cheap and gives American companies opening factories in China an artificial subsidy. That’s good for China but bad for America, and helps explain our soaring trade imbalance with China. An extraordinary 83 percent of America’s non-oil trade deficit is with China. During the downturn, our trade deficit with other countries has been shrinking — but not with China.

So President Obama should insist that China stop this huge subsidy that is distorting trade across the world.

Here is another reason for China to stop this practice: it is keeping the Chinese people poor. Yes, on the one hand Chinese currency manipulation steals jobs from the rest of the world and brings them to China. But on the other hand, keeping their currency low keeps the people who get those jobs from being able to buy things made elsewhere. It keeps the prices on goods made outside of China much higher than market levels.

If China rebalances its currency to market levels the Chinese people's purchasing power would instantly increase. They would be able to buy the things we make, and this would stimulate manufacturing here. This rebalancing would be good for the Chinese people and for the rest of the world. It would help stimulate internal markets there as well as trade with the rest of the world. It would help us rebalance our debts and start earning the money to start paying backwhat we have borrowed.

So this is something China can do with the stroke of a pen to help rebalance the world economy, rebuild our manufacturing sector—providing good jobs here—and helping their own people to be able to enjoy the benefits of a world economy.

What Chinese Currency Manipulation Looks Like

Eric Lotke — Thu, 12 Nov 2009 14:15:28 -0500

As President Obama packs for China, I thought I’d show him a picture of how China is manipulating its currency.

Source: Federal Reserve: Yuan, Broad dollar index.
Graphic idea compliments of AAM.

The dollar stays flat against the Chinese Yuan, even as it loses value against other major currencies. The dollar is down to $1.50 per Euro, compared to $1.27 at this time last year (sorry to folks daydreaming about summer in Italy). It's down against the Canadian dollar, the Japanese yen and the entire "broad dollar index" tracked by the Federal Reserve. But the dollar is unchanged against the Chinese Yuan (unless one considers 6.836 to 6.827 a drop).

Everyone knows this is happening. Treasury Secretary Timothy Geithner even used the word “manipulating” with the Senate Finance Committee mere hours before it voted to recommend his confirmation.

The dollar exchange with China “defies the laws of monetary physics.” During this U.S.-led global recession, dollars aren’t worth as much as they once were. The natural physics of exchange makes U.S. goods relatively less expensive for others to buy, but makes foreign goods more expensive for Americans to buy. In a free market for currency, that would help bring accounts back into balance.

But China treats those laws as optional. China’s deliberate policy of pegging the Yuan to the dollar makes American imports of Chinese goods artificially cheap and gives American companies opening factories in China an artificial subsidy. That’s good for China but bad for America, and helps explain our soaring trade imbalance with China. An extraordinary 83 percent of America’s non-oil trade deficit is with China. During the downturn, our trade deficit with other countries has been shrinking — but not with China.

The wheels of change are starting to turn. The Obama administration stood up to China when it imposed tariffs on Chinese tires and pipes dumped in the U.S. markets. The chattering class called it a trade war, but it’s not. It’s just applying the same rules of free trade that other countries respect, and that China agreed to when it entered the G-20 and was granted permanent normal trade relations with the US. Obama just blew the whistle.

The G-20 summit in Pittsburgh in September concluded with a joint statement to seek “more balanced growth as part of the global economic reconstruction.” The entire G-20 signed on — including China — but China’s name was in bold in the quest for “balance,” and everyone knew it.

Now America’s high level trip to Asia opens with a joint op-ed written by our own Timothy Geithner along with the finance ministers of Indonesia and Singapore. They repeat the goal of “strong and balanced growth” and expressly state that “Market-oriented exchange rates in line with economic fundamentals will be essential.”

China seems to be paying attention. In its third-quarter monetary policy report, the People's Bank of China suggested that it might consider other major currencies, not just the dollar, in guiding the exchange rate. That's not quite a free market float, but it's better than the dollar peg.

In the American heartland the issue isn’t exchange rates, of course. The issue is jobs. American workers can compete dollar for dollar against Chinese workers. They can’t compete dollars against manipulated Yuans.

America's economic future is intimately tied to China's. Let’s hope Barack Obama remembers who he’s working for.

Tripping in China: Barack Obama's Challenge

Robert Borosage — Thu, 12 Nov 2009 11:23:53 -0500

This week, Barack Obama trips to China as part of an eight-day trip to Asia. The White House paints a full agenda: Afghanistan, human rights, North Korean nukes, climate change, trade relations, and the economy. But it's really just the economy, stupid.

For decades during the Cold War, the U.S. gave security concerns priority over economic issues. Now the economy is our central security concern. It will simply be another measure of the administration's gathering calamity in Afghanistan if that is allowed to distract from the essential discussions about the economy.

On economic issues, Asian leaders, particularly the Chinese, are in the mood to deliver lectures, not receive them. It was the excesses of Wall Street that brought the world to its knees. And Asian nations, not burdened zombie banks or purblind conservative politicians, are enjoying a rapid recovery, after boosting demand with large-scale government spending.

But the president has a vital message to deliver. We can't go back to the old bubble-bust economy. That requires more than just financial reform. Central to that old economy was our relationship to the mercantilist nations of Asia, particularly China. For years, the U.S. consumed more than it made, running up record trade deficits. The Asian nations, particularly China, financed our consumption to increase their exports and market share. The Chinese kept their currency undervalued, hoarded dollars and bought up treasury bills, enabling the U.S. to borrow more and more without suffering rising interest rates. That helped inflate the housing bubble that finally blew up in our faces.

Correcting this imbalance—even as we move to meet the challenge of catastrophic climate change—is essential. Thus far, President Obama has forwarded this discussion carefully. He got the G-20 nations (including China) to establish a mandate for more balanced growth as part of the global economic reconstruction. The IMF has been tasked with monitoring— and pressuring—surplus as well as deficit nations to change their ways.

And the president has shown some teeth. He signed off on slapping temporary tariffs on cheap tires flooding in from China. Punitive tariffs have just been imposed on steel pipe dumped on the market by the Chinese. Serendipitously, the World Trade Organization ruled in August that Chinese restrictions on foreign publications, film and music imports are illegal.

The Chinese haven't gotten the message yet. They did a far better job than the administration in boosting their economy with a bold stimulus package, but much of the spending went to new infrastructure designed to boost exports. They continue to manipulate their currency while denying it. They decry protectionism while practicing it. They've now made a commitment to new energy, but significantly as an export industry, while continuing to open a coal-fired energy plant every week.

So what should the president do when he talks to our bankers in China? In public, for this president particularly, we can expect vision, not fireworks. We can hope for more candid discussions in private, with Secretary of State Hillary Clinton there to provide the needed grit. Here's what we should look for from Obama in public.

1. Forcefully State the New Reality

The President should forcefully state the new reality. We can't go back to the old imbalances. As recovery gains force, there must be adjustments in both surplus nations and deficit nations. This can be difficult and antagonistic or cooperative and mutually beneficial—but one way or the other, it must occur.

The U.S. has already begun. American consumers are tightening their belts, and have begun to save more and to pay down debts. The American government will invest more, and once the economy recovers, lower its deficits. The U.S. will export more and buy less from abroad. We will move to a more balanced trade posture.

Thus the surplus nations—whether Germany in Europe or China and Japan in Asia—must rely less on America as the source of demand. They should be consuming more of what they make. This can be immensely beneficial to their people. Workers should be empowered to gain better wages, and their societies can afford social supports from pensions to paid vacations. Service industries can expand. In emerging from the crisis, regional trade has already expanded faster than exports to the U.S.

2. Invoke the Vision of a New Age

The president should emphasize that the new economy will be built amid a new green industrial revolution. Catastrophic climate change, accelerating beyond scientific estimates, brooks no alternative. This, too, requires wrenching, massive transformation—but it also can be the source for growth and jobs as we balance the global economy.

Addressing catastrophic climate change will generate enormous demand—for new energy, for rebuilding old buildings, for new transportation systems. We will change the way we live, the way we travel, the way we work. This transition will generate new jobs, new inventions and new industries.

This transition can disintegrate into bitter disputes about who is to blame and who is to pay. Instead the president should focus on the challenges and the opportunities it presents. Mandating this transition can also help in the move to a more balanced global economy, fostering decentralized production closer to markets, just as the movement for slow food encourages local farming. Yes, we will need to assist poorer countries and poorer people within each country in the transition. Companies must not be allowed to undermine progress by playing off countries with weak environmental standards against those with stronger ones. But we should not let the costs and the disputes blind us to the opportunity.

3. Make Human Rights the Measure of Progress

The president should publicly reaffirm our commitment to human rights. The Declaration of Human Rights forged after World War II made protection of basic human rights, from freedom of speech to the right to organize to the right to a good job, the central charge of the peace. In the Cold War years, rivalry turned human rights into ideological weapons, with the U.S. championing free speech and property rights and the Soviet Union celebrating economic rights.

Now the president should reassert the reality that basic human rights are indivisible. And increasingly, we understand that they are also economic imperatives. A vibrant market cannot function without the rule of law. Free speech is essential to freedom of contract. To sustain growing economies over time, workers must have the right to organize so the blessings of growth can be widely shared. Basic protections like health care, education and old-age security make it possible for consumer societies to flourish.

4. Show Some Grit in Private

The private discussions will be and should be more contentious. The president needs to make it clear that the old days are over. The U.S. will move to more balanced trade. That means that we'll invest to make our own economy more productive. We'll slowly bring our budget deficits down as the economy recovers.

And we will enforce our trade laws. American states and localities will pass Buy America provisions. China should not be misled by corporate lobbies. It will find more and more resistance if it continues to play by a different set of rules.

The president should be clear about reality. China's currency is undervalued. This feeds the trade imbalances. It threatens China too, as investors will increasingly move to China, assuming that the currency must go up. The Chinese will risk a growing bubble in assets—housing, commercial property, stock markets—that could well expand and burst with destructive consequence. Abrupt unilateral moves could destabilize the dollar. We have a mutual interest in agreeing on currency adjustment.

The Chinese want the U.S. to recognize it as a market economy, to make it more difficult to penalize its trade malpractices. The president should be brutally candid about this. A mercantilist nation that doesn't play by the global rules will not be so recognized. A nation that doesn't enforce labor rights will get special scrutiny. A country that undervalues its currency for trade advantage doesn't qualify. Concessions on this will follow changes in practice, not promises of future reform.

Finally, the president should be frank about his human rights commitments. The U.S. will not seek to embarrass the Chinese generically. But the U.S. will remain an advocate of basic human rights. We will continue to report on violations, and condemn them when they are egregious. The president will meet with human rights champions, including the Dalai Lama.

Moreover, he should indicate that his administration will place increased emphasis on worker rights and decent work, as well as women's rights, both at home and abroad. We will seek to help countries move to empowering workers, to guaranteeing basic rights. We surely will reward those countries that are democracies that respect human rights over those that are not.

China and the U.S. have been in a long, intense relationship that is no longer functional. Renegotiating the terms won't be easy. Neither partner can afford a divorce. Both will find it difficult to change their own ways. Neither has exactly been straight with the other in the past. At best, this trip will lead both to agree that something must be done.