The Debtor's Dance: the U.S.-China Exchange

Obama's opening speech set the stakes: "The relationship between the United States and China will shape the 21st century, which makes it as important as any bilateral relationship in the world." (emphasis added) The U.S., the world's largest debtor, met this week with the confident leaders of its largest creditor, the communist government of China.

What took place over the last two days was hailed by Secretary of State Hillary Clinton as "unprecedented," the "largest gathering ever of top leaders from our two countries," addressing an "unparalleled" range of issues.

The American press, of course, was more focused on Sarah Palin's departure than the Chinese arrival. Neither the New York Times nor the Washington Post managed a report on the discussions in the Wednesday paper.

This isn't surprising since any conversations that were candid were private, and there was little of substance to announce.

But the exchange was revealing in its own way. President Obama, exercising his remarkable gift for presenting a sea change as a gentle current, laid out the fundamental challenge almost in passing:

Going forward, we can deepen this cooperation. ....And as Americans save more and Chinese are able to spend more, we can put growth on a more sustainable foundation -- because just as China has benefited from substantial investment and profitable exports, China can also be an enormous market for American goods.

This has been Obama's revolutionary message to the leaders of the world. The U.S. cannot go back to the old economy where we borrowed $2 billion a day, largely from the Chinese, to be the consumer of the world by living far beyond our means. We must consume less, produce more, and sell more abroad and balance our trade.

Therefore, the nations that have pursued export led growth -- notably the Chinese, Japan, the Asian tigers, as well as Germany and others, will have to develop new strategies. The Chinese, the administration argues, will have to save less, consume more at home, and rely less on exports to generate jobs and growth.

This represents a staggering transformation that will require stark changes in policy across the world. The U.S. will need an industrial policy, a more aggressive trade strategy, higher top end taxes to reduce private consumption and balance our fiscal budgets, a smaller financial sector, and a dramatic change in our consumer driven and debt laden economy. The Chinese will need to develop a new social contract -- health care, pensions, higher wages, paid vacations -- for its workers, transform its domestic banking system, dismantle its mercantilist trade practices, invest massively in domestic infrastructure.

This is the right moment to undertake this necessary transformation. Trade has collapsed in the Great Recession. U.S. trade deficits have declined as exports and imports plummeted. U.S. consumers have gone from spending more than they earned to saving, as families struggle to recover from the trillions of wealth lost in the decline of home values and retirement savings. The Chinese have joined the U.S. in a major domestic stimulus plan, investing hundreds of billions in infrastructure and other projects to keep their economy moving and people working.

But these are elements of the crisis or responses to it. The obvious question is what are the policies that will drive this transformation as the economy recovers?

Here the Chinese were, even in the midst of diplomatic niceties, brutally clear. They plan to increase domestic demand, to move aggressively on energy efficiency. They believe the industrial countries should bear the burden of dealing with global warming, but are happy to capture the industries and technologies involved. They also want the U.S. to keep the dollar strong (read -- will continue to undervalue their currency), and will sustain the mercantilist practices -- from controlling access to their market, to formal and informal buy China policies, to buying or stealing technology -- that have been central to their remarkable economic growth.

What is the U.S. strategy? President Obama suggested in his speech that "We can pursue trade that is free and fair, and seek to conclude an ambitious and balanced Doha Round agreement." And we can cooperate to transform our energy economies: "We can expand joint efforts at research and development to promote the clean and efficient use of energy; ...And the best way to foster the innovation that can increase our security and prosperity is to keep our markets open to new ideas, new exchanges, and new sources of energy."

But this isn't a new course -- it is a return to the pieties and shibboleths of the old policies that helped make us the world's largest debtor. The Doha Round offers nothing but a symbolic curtsy to the old trade dialogue. "Joint efforts at research and development" are fine, as long as we realize that the Chinese will use the technology, limit access to their market, and aggressively try to capture the export markets in solar, wind and next generation to come. Keeping "our markets open to new ideas, new exchanges, and new sources of energy" sounds good, but ignores the extent to which the Chinese seek to control access to their markets and ours.

This is not a serious policy agenda; it is the noblesse oblige of a wealthy nation unwilling or unable to understand how deep a hole it is in, and how much it has to change.

If Obama's agenda seemed musty, Treasury Secretary Geithner's seemed oblivious. What are the "structural policies" to lay the foundation for "a more sustainable and balanced trajectory of growth"" According to Geithner, they've largely already happened. "We've already seen a pretty substantial increase in private savings. Our current account and balance has fallen sharply." And we'll move to reduce our public deficits once the economy gets going.

But we ran budget surpluses under Clinton and still racked up rising trade deficits and foreign debt. Recession isn't really a sustainable answer, we hope. Perhaps the shock of the Great Depression will make affluent Americans -- those who make over $100,000 a year and account for over half of all consumption -- buy less. But if the economy does come back, will personal austerity be sustained? (And if it is, how will the economy come back?). The tarnished icons of the Wall Street -- Goldman Sachs and JPMorgan -- reveal the lure of the old ways. Although still dependent on public subsidies, they are already back to high leveraged, computer driven gambling, and pocketing millions in bonuses from trading profits.

As for China, Geithner's summary remarks at the end of the discussions recycled the boilerplate of the old era:

We reaffirmed our very important commitment to an open, rules-based, multilateral regime for trade and investment. We reiterated our commitment to avoid protectionist measures to bring about a success -- and to bring about a successful conclusion to the Doha round. China and the United States committed to treating firms with foreign ownership operating in our markets exactly as we do domestically owned firms when it comes to government procurement.

Nonsense. China has progressed largely by ignoring the rules that got in its way. It has developed -- as the U.S. did as a rising power -- by skillful use of mercantilist trade policies. Ask European manufacturers of wind turbines with plants in China how committed China is to treating "firms with foreign ownership operating in our markets exactly as we do domestically owned firms."

No one expects public remarks to be candid. But papering over differences is a far remove from suggesting that black is white.

So what do we make of these "unprecedented" talks with the "most important bilateral relationship in the world?" The private discussions with the Chinese leaders no doubt were far more candid and far tougher than the public statements. We can be thankful that Obama has put before the Chinese and the world the reality that the U.S. cannot go back to being the consumer of the world on borrowed money.

But what is most apparent is that the Chinese have a policy that has worked well for them thus far. They will evolve according to their own interests. What isn't apparent is whether this administration has a policy to get us where it sensibly says we must go. Embrace of Doha and platitudes about "open, rules-based" trade, ritual denial of reality surely won't get us there.

 

Comments

[kemo5]

We're screwed. What can the US really do? China has most of the cards. We can only hope for small change anyway. If we take the steps really needed, inflation increases, and all the dull witted voters will vote in someone else who will be in bed with the corporations. It would take decades to right this ship, but we would probably have some conservative years to take us many steps backward again. Our only hope is that 8 years of an Obama administration can lay the foundation of financial change that conservatives would have difficulty undoing. I'm not exactly optimistic. China isn't going to go against its own interests.

[beachss]

I repeat ... Isn't it interesting ? .... The banks and mortgage and insurance companies gambled away all the money .... the debt still exists ... China picked up the tab to make sales of their stuff and now interest and now....... the capital is spent, the equity is gone and we're devaluing the money to pay them back Who screwed who ? China is really positioned exactly where they simply [made bad loans] and we are positioned to say; ' Oh yeah, we'll pay ya back ASAP' .... The rotten short-sighted American companys that orphaned our American WORKFORCE and set-up shop in China better watch their step because that form of government changes policy by [fickle committee] and might just take over their factories and kick them out of the country.

[frankli]

Ask yourself this question: Do you still believe in capitalism? If no, stop right here. If yes, read on.
(1) Globalization is part of capitalism since day 1 (e.g. the slavery days or getting a bunch of Chinese laborers here to build the railway in the west), although it was not called globalization until recently. (2) Capitalism is about profits, nothing else such as job creation. (3) Government has 2 primary funcitons: defense and diplomacy. Let's keep it this way, because it's not good at anything else. Creating jobs? Yeah, buying jobs with our money via taxes!! (4) Despite all the problems, America remains to be the land of opportunity - You can make it if you work hard & smart. (5) Many of our problems can be solved by doing these 3 things: Term-limit for politicians. Gun control. Having losers pay for the lawsuits (the British system?).

[daddysboy]

American industry, jobs, and wealth have been slowly transferred offshore over the last 50 years or so leaving an empty, consumer shell of an economy. What needs to happen is that American businesses should be FULLY taxed exactly the difference that makes up any incentive to move offshore. The same way they should be taxed the difference in pay and benefits made up by using illegal immigrant work. The same way they should be taxed for not providing basic health-care for ALL workers. Our dollars have been going down an off-shore rat-hole for years; it's time to take back some of those dollars and make them work for the American people. If American businesses want to continue, startup, or thrive, there should be a DRAMATIC incentive to do it here where our economy and future generations of laborers , thinkers , and managers will benefit. Obama is falling for the same lies that have kept us on a downward spiral for years.

[frankwatson]

You win, we surrender! Create your own jobs and investment. We give up and will just wait for Obama to take care of us. Unionize every worker, drive every remaining business into bankruptcy and chase away all investment. Let the crooks & Mafiosos who run the unions create investment, employment and innovation­.... Let Obama who bows and scrapes before the unions who support him and who he rewards with massive giveaways create employment, innovation and investment. He can turn the country into on giant community organizing business and since there will be no private investment and no business income to tax we can all work for the government that will have no source of revenue! THEN OBAMA / GOVERNMENT CAN PRETEND TO PAY US WHILE WE PRETEND TO WORK! ROFL!

[BartRoberts]

"Let the crooks & Mafiosos who run the unions create investment, employment and innovation­.... "

But, you clearly don't expect the parasites of Wall Street to produce any wealth? The lords of the universe no longer get rich for actually producing anything. Instead, they make their wealth trading monopoly money.

It's time to restore the capital gains tax to its former levels and stop letting people get rich for being parasites on the productive sectors of society.

[den1953]

Thank god i love Chinese food!

[frankwatson]

The good news that the Obama "Myth" is losing it's luster. The public were duped into voting for him by a clever but fraudulent political campaign and a radical left wing media that is in reality the Public relations arm of the extreme left of the Democratic party. The more they hear from Obama, a left wing extremist who speaks politely posing as a moderate the more they are disenchanted with the phony Myth of Obama. Hopefully Obama / Pelosi / Reid will self destruct and this will be their last terms. It seems that the American public who may love Obama the charmer still believe in free enterprise, balanced budgets, the rights of the individual and have a well deserved mistrust and lack of faith in the governments ability to do anything efficiently or honestly. Hooray, for Middle America they finally woke up and are rejecting Bill Ayers, Reverend Wright, Saul Alinsky and the San Fran radicals as so perfectly typified by Obama.

[dredeyedick]

"This represents a staggering transformation that will require stark changes in policy across the world. The U.S. will need an industrial policy, a more aggressive trade strategy, higher top end taxes to reduce private consumption and balance our fiscal budgets, a smaller financial sector, and a dramatic change in our consumer driven and debt laden economy. The Chinese will need to develop a new social contract -- health care, pensions, higher wages, paid vacations -- for its workers, transform its domestic banking system, dismantle its mercantilist trade practices, invest massively in domestic infrastruc­ture."

Perhaps true. But incomplete. In addition to the above, the US will have to accomplish every single item prescribed for China as well. It is the US that needs to develop a new social contract - health care, pensions, higher wages, paid vacations - for its workers. It is the US that needs to transform it's banking system. It is the US as well as China that must dismantle its mercantilist trade practices, and it is definitely true that the US must invest massively in domestic infrastructure.

Re-instituting the rule of law in the US should be concomitant therapy.

fwiw,
David C. Manchester
http://dredeyedick.wordpress.com

[scottowego]

I love it.... Walmart...­. Save money... live better.... look where that's got us.

[boldtimer]

"The American press, of course, was more focused on Sarah Palin's departure than the Chinese arrival."

But Sarah Palins departure is important according to Author and Columnist Naomi Klein in an article published in AlterNet; http://www.alternet.org/workplace/141656/naomi_klein%3A_let%27s_put_an_end_to_sarah_palin-style_capitalism/?page=entire

It marks the end of a capitalist era where pillaging finite natural resources for profit and moving on were acceptable, regardless of the ultimate devestation inflicted on society and the environment !

[marthainmaine]

And NAFTA worked out great? The Clinton think they run the dem party right?

[jeanrenoir]

China's got by far the easier row to hoe from here on out. All they have to do, over time, is stimulate consumer demand at home, to replace the permanent loss of exports to a much poorer USA. We, on the other hand, have got to "produce more." But what exactly are we capable of producing more OF? We keep losing manufacturing jobs to other countries, and compete less and less in that area. The handwriting is clearly on the wall for our IT industry as India's tidalwave of highly-trained, brilliant IT students will obviously, in the coming decades, swamp our IT industry exactly as China swamped our manufacturers. And as both China and India eventually surpass us in GDP, they'll surely take our international banking leadership away, too. So what's left--lots more Miley Cyruses? Seems like a rather slender reed to support our economic future? All those "green jobs" better come down the pike REALLY fast.

[PDH5204]

Mr. Borosage, what leverage to do we have? The Chinese drop their dollars and we're finished. And if that wasn't a prospect frightening enough, heaven forbid that oil starts trading in something other than dollars.

By the way, don't blame the Chinese if they ever decide to dump the dollar. During the Suez War, Eisenhower got the British to drop their support of Israel by preventing the IMF from stabilizing the British pound during a run on the same. So hard for us to complain if the Chinese use currency as a weapon as well.

Lastly, some forget our other and more relevant history. We were a debtor nation long before before Reagan, for a hundred years or so, in fact. We built our railroads, canals, ports, factories, and cities on foreign money. The problem now is that those things made us productive, so we could service the debt, whereas now we invest in Nintendo play stations that simply do not offer much prospect of an increased productivity that will service our debt.

[Amalek]

As long as we keep buying the Chinese will leave us alone. Get off your computer and go down to walmart and buy us some peace.

[PDH5204]

Yes, and the drug pusher says the same thing. Sorry that I left that out of my prior post. And re that robust domestic Chinese consumption that you mentioned in that one other post of yours, well, what we don't want is exactly what you describe, since with the drug pusher creating more drug users, he'll have more liberty to cut us off cold turkey. Now if you wish to forgive us our debt as well, then it's all good, at least so long as we come to know of our addiction.

[mdspatsy]

Interestingly completed on America and China !s new relationship.
Now,China has emerged as a World Super Power.Chin­a is a creditor.A­merica is a debtor.
Now,Americans has to show to this world,She is still in supreme in Higher education,total freedom of expression­s,African-­American!s share to America!s day today prosperity.
To be produced more and more,less consumption,less expenses for daily entertainment activities,more on health care,wise savings are latest essentials for Americans.

[Amalek]

The good news from this conference is the HuffPost is no longer blocked in China.

The good news for the world is that China is capable of developing robust domestic consumption, which will be good news for everyone.

Americans, like the author, need to get over their concept of American exceptionalism.

[Brunobear]

Reading the comments on this topic it is clear that no one in the US has a clue in 2009.

Obama is just dealing with the cards he was delivered on his arrival as President. The issues that led to the current situation go back decades and have little to do with him.

A senior Chinese banker told me in Melbourne back in 2003 that his Government were concerned at having US$200 billion in US currency reserves and were thinking of switching some to Euro's. They didn't! They now have US$600 billion in US currency reserves. A lot of money bit not a lot of money for the US economy. China is not funding the US, US$2 billion a day as claimed. That is nonsense.

America needs a man with the astuteness and wisdom of Harry Hopkins (FDR's right hand fix it man) to pull it out of the mess it is in. At present the US is effectively broke. If it was a company it would be in receivership. America needs a man with the ability to take a failing business and turn it around. Such men are rare indeed. Most insolvency people just liquidate and wind up, not rescue.

America should look to Australia and how it does things. Australia got it right and assists many without harming anybody.

It is no point now in playing the blame game. The US needs to play the survival game.