Tripping in China: Barack Obama's Challenge

This week, Barack Obama trips to China -- as part of an 8 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 US 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 US 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, bought up treasury bills, enabling the US 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 WTO ruled in August that the Chinese restrictions on foreign publications, film and music imports are illegal.

The Chinese haven't got 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 Clinton there to provide the needed grit. Here's what we should look for in public

1. Forceful Statement of 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 US 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 US 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; social supports from pensions to paid vacations can be afforded. Service industries expanded. In emerging from the crisis, regional trade has already expanded faster than exports to the US.

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, like 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 US 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 US 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 - which 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 US 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 US will not seek to embarrass the Chinese generically. But the US 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 Dali 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 US 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.

 

Comments

[billy371]

Looks like Obama is in for a toughie with this one how will he satisfy both the Chinese Government and the Dalai Lama. Here’s an interesting angle.
http://ketiva.com/News_and_Events/china__turns_to_lincoln_to_try_to_prevent_an_obama__dalai_lama_meeting.html

[expired]

Bush and the Saudi prince sitting in a tree . . .

http://www.csmonitor.com/2005/0426/dailyUpdate.html

[phsamuel]

"But it's really just the economy, stupid. "

well said, but yet the author doesn't seem to even understand comparative advantage...

[cliffsiderock]

The big difference between the massive stimulus in China and in the US is that the Chinese are stimulating their economy using their own money where we're using money borrowed from China and other countries. The Chinese are free to use their own money to give Chinese companies a competitive advantage around the world. What do you think our creditors will do if you think we are using the money they lend us to make our companies more competitive than theirs? They'll stop lending to us and we are really going to get a deep depression that will make the one in the 20s looks like a minor dip in the chart. I'm sorry to break the news but we have already lost the game by our prolonged national hobby of spending beyond our means and our pipe dream of entitlements without producing enough to earn it in the the first place. The US is like a macro version of GM and we all know how the story goes.

[Chazet2]

The Chinese are funding their development with money made by exporting goods to places like the US. It is their money, but made from us. The major differences are they spend that money consuming only goods "Made in China", while we excluded such provisions in our stimulus.
They are also using the money to produce assets. We are cutting taxes, widening roads, and filling potholes. The money we spend will not bring the long term benefit that theirs will.

[OntheContrary]

You want the imbalance to be corrected? Simple, just sell them the high tech stuff that the Chinese needs. Oh sorry! Forget about this suggestion because those high tech stuff will help China's military with the dual usage. You see, the Chinese can only buy so much wheat, corn, beef and Boeing jets from us. We cannot put export restriction on high technology and complaint about trade imbalance. Besides, I believe by opening up these high tech trade with China, I believe it will actually help our high tech industry to be more competitive and actually improve our technology edge over other competiting nations like France, Russia and Germany. Whether China will benefit from dual usage of the techonogy is debatable. If you have close interaction with the buyers you can control your product better and actually gain an insight understanding of their capability which is beneficial to our military intelligence.

[causewayy]

Bottom line - the US is BANKRUPT and is in no position to lecture ANYONE on economic realities

The US should practice what it preached - and absorb the same shock therapy it demanded that Asia and Latin america absorb

[bwenston42]

Buy American supports americans. Buy The Peoples Republic of China supports our sworn enemy.

[Puller58]

Afraid this is just a glorified photo op. SOP for modern Presidents, so Obama shouldn't be blamed too much.

[2Truthy]

It's NOT the Economy, Stupid. IT'S YOUR JOB!

Mr. Borosage,

China and the US can start being "exactly straight with each other" by addressing human rights/labor issues to strengthen the socioeconomic fabric of each respective culture. In his negotiations, Obama would do middle-upper middle class (read: non-portfolio class, non-hubris elite class) citizens a great disservice to perpetuate the myth that our current US corporate-welfare sponsored government is any less despicable with its legalized practice of replacing Americans with cheap imported labor and rampant age discrimination practices.

When it comes to discussing labor policies, 'JOBS' for American workers can no longer be discarded like some old Black & Decker power tool in the garage by the substitution of the word 'ECONOMY' to conceal the demise of US lives.

Until Obama gets serious about reforming corporate America's unconscionable, cheap labor/age discrimination abuses responsible for labor arbitrage and millions of educated Americans now in the unemployment lines, there is no reason for the Asian continent along with the rest of the world to not laugh mightily in the face of a POTUS over such glaring hypocrisy.

Yours,
2Truthy

[OntheContrary]

It is so convenient for the author to spin the blame on China. The truth of the matter is this financial debacle caused the great downfall of America and is not as a result of China manipulating the currency, it is us, the American people who allow the greeds and excesses on main street and Wall Street to go uncheck. Greenspan's interest rate policy, the inept SEC, Goldman doing God's work, 'ninja' loan, illegal alien sucking up our health care, Madoff's ponzi scheme...just to name a few are the real culprit.

[Robert L. Borosage - Huffpost Blogger]

No question Wall Street, Greenspan, bipartisan financial deregulation all contributed to the mess.

But the global imbalances -- with China hoarding dollars, buying up treasuries, helping the US live beyond its means, while they captured markets and jobs -- were at the core. The IMF was warning for years that these were unsustainable. And indeed they were and are.

[causewayy]

Sorry - I missed the bit where Hu Jintao and the Red Army marched into the US and forced US companies to shut down plants, move factories etc to China.

What caused that was the sheer short termist GREED of US companies and the US people looking for a quick buck on investment returns
That idea continues to this day with Wall street continually looking at the the next month's / next quarter's performance.

No one FORCED the american consumer to buy a brand new 50 gallon to the mile SUV every year; no one forced americn Joe consumer to buy a new 1000 inch flat panel TV to replace the 990 inch flat panel TV he bought last year

[Realization]

If you don't think Chinese policies (and lack of effective American response) are a problem, I assume you won't object to the U.S. rigging a 40% exchange rate advantage, controlling all currency exchanges, limiting FDI, demanding that firms transfer tech in joint ventures with domestic firms, stealing intellectual property, industrial targeting, massive subsidies, and higher tariffs.

Mirror images of their policies (in effect if not in all details) would provide an interesting experiment.

The result when one side has all those advantages is, of course, quite clear. But then Americans (economists, media, etc. not necessarily the guy on the street who is misinformed by these) have been ignoring cause and effect in international trade for a very long time.

Mirror image Japan and Korea, too. And the EU, while we are at it.

I suspect it really wouldn't take that much to cut our imports drastically.

Oh, and as for really solving our problems with increased exports, Japan and Korea and China will not really allow products in on a big scale if those products compete with something they make or intend to make.

[causewayy]

I won't take much to cut imports - all it takes is for the US consumer to stop listening to the advertising wonks on TV

It may shock Joe Consumer but that new car he brought last year, in all probability will still work next year; the fancy new TV he bought last year will still work next year; I may be wrong but it's still impossible to be able to watch a TV upstairs while you're downstairs - as such a family of 4 probably doesn't need 5 TVs

[mommamia526]

Well, I have no earthly idea what Mr. Obama will be discussing in Asia. I have noticed that other countries are also sending off representatives. For Europe one of the problems is too large an influx of Asian and other labor, immigrants, etc. As for the U.S. economy, many corporations are no(t) (longer) national. Large corporations, such as Walmart, have used comparative advantage for quite some time, to be able to get marketshare for their sales. To be able to compete others must follow and also cut cost of production, etc., whether they want to or not, otherwise they will not sell. Then there is advertising and placement in stores which is very influentual. Large corporations with large sales get the best shelving in the store. My guess is, that Mr. Obama will be discussing several different topics. Terrorism and politics come to mind. China invests and buys where the best deals are, and may thus be playing in the hands of some groups which are now not having *favored state* designation. Financial markets are also not national. Currency trade is not new to the world. It is fairly new here, at least to the consumer. Again, I have no earthly idea, but most of the comment on this thread is off topic and irrelevant.

[capitaldysfunction]

The Republicans nearly killed the American economy. Now the Chinese are poised to finish the job. We simply can't afford to wallow through this terrible negative relationship. Divorce.

[bwenston42]

Its not the just the Republicans who nearly killed the American economy. It started with President Nixon, then President Carter, then President Reagan, then President Bush 1, then President Clinton then, President Bush 2, and now President Opama. But mostly, it is the fault the American consumer for not caring where things are made just that they are cheap. American consumers need to buy only products made in the United States. Why you ask? Well that way this country remains a dominant figure in the world. Anything else gives our power to our sworn enemy --The Peoples Republic Of China. Which by the way is a communist country.

[William50]

Facts? You can't face the facts! Yes wall street is a major player in the economy. Yes the banks need to move money threw over inflated value homes is a part. Yes, the governments willingness to set up families in loans is a part of the problem...all of these minor issues including China area part, a small part of the problem.
The major part, the eighty percent part, the foundation of this problem is two fold. The first is the voodoo idea that American consumers can continue to consume with out wages equal to the real costs they are living with. Housing, insurance, health-care, cars, fuel all have expanded three four or five hundred percent while the wages the Americans were actually getting with inflation was at thirty percent for the same time period. The second part of this equation is government and management stupidity in allowing the quality of American products to fall and to stay the worlds policeman.
Give me ten new voices in the Senate next year and I will, will!, begin real programs that will put Americans back to work.
middleamerican2010
Casey

[ResistanceisFutile]

What would happen if we didn't pay our international debts? Would we be eligible for a World bank Bailout similar to those other countries have received?

Bush and Cheney have put this country in quite a bind. They gave tax breaks to the wealthy and financed two wars with borrowed money.

It will be interesting to see what Obama gives away to the China. Clinton gave away our manufacturing base and Bush gave away our future.

Sorry for the rambling base. I am feeling overwhelmed and depressed by the hole that our leaders have dug for us.

[causewayy]

Your leaders didn't dig the hile - the american people dug the hole

As you're fond of lecturing everyone your government is "of the people, BY THE PEOPLe, for the people"
You're fond of lecturing the world on democracy - well here's an idea - start voting - just because there are no term limits, doesn't mean a Rep or Senator must be allowed to serve 5 - 10 terms in Congress.
If the Reps / Senators won't accept term limits - force it on them by voting them out every 1 or 2 terms

Make it clear to them that they work for YOU, not the other way around

[mommamia526]

Right ON! Causeway. However, our representatives do not do currency trading, banking, manufacturing. The industrial base was allowed to be outsourced and it started large scale with Ronald Reagan's Reaganomics of deregulation. In the U.S. everything is measured by comparative advantage of capital. One measures one's position and standing by one's current bank account. We see it published every year. Who is the richest person THIS year? Paper, numbers on a computer screen, good credit is not wealth. It may be a means of creating wealth. But, I am with you. Let us vote, and not only that, lets us write and email our representatives and remind them whom they work for. The very best remedy, however, is new startup American Companies, and the public trading with them. Ownership of workers in a company is also a good idea, because the profit of the company they work for, and how long it will be in business, is what the worker depends on.

[ResistanceisFutile]

I have been voting for fifty years.

Our elected representatives are non responsive to the American Public. Just look at their current stances on healthcare reform.

[equianimi]

Why do people continue to say the Chinese manipulate their currency when they simply Peg it to the dollar. Many countries around the world are pegged either to the dollar or other currencies. This is a complaint from those that lack the understanding of what is really going on. Our politicians like to point the finger at China but they know they know if the Chinese let their currency float the dollar would sink, Chinese goods would cost much more and our standard of living would fall dramatically. It will happen sooner or later, but no politicians want that to happen on their watch so they put off the inevitable and hope it falls on someones lap other than their own.
As Americans, and American politicians, we love cheap goods, we love the fact that we don't have to make them, and we love having others finance our spending spree. When the Chinese take their currency off the Peg to the dollar all of this will end. So it's time to stop acting like the Chinese are out to screw us, when we're dug our own grave and we continue to dig it even deeper.

[Robert L. Borosage - Huffpost Blogger]

They peg it to the dollar at an undervalued level designed to help them capture export markets.
It could be pegged to the dollar at a more realistic level.

And yes, the dollar is losing value (to all currencies except those like China purposefully overvalued). That will help us increase exports and will make imports more expensive. It is a necessary part of moving to a more balanced position.

[Realization]

It would only increase exports to China to the extent China allowed. The free market does not work in this case. It would make us more competitive in many ways. It might make some Caterpillar equipment cheaper for them. But then Cat only sells stuff that is a sort of Gucci product in its own way. Then might at any time decide to compete if it is worth it. But they will compete first in products with mass markets that they can support with ever (for a time) increasing domestic demand. Or target things like civil aircraft where they will make do with older generation tech until they catch up.

It comes down to producing here and making sure we benefit fully from our own tech developments. Pushing exports as a policy will help avoid stagnation and provide competition, but most of that should be in foreign markets, possibly third country markets.

[causewayy]

who says it's undervalued - what I have found is that the US is fond of blaming others for the mess that YOUR policies have created

why doesn't the US accept some of that "darn good" shock therapy that Larry summers demanded Asian countries absorb in the 1990s ??

[mommamia526]

Unfortunately other countries do not all have free markets. They have protected industries and interests. They subsidize. They restrict imports. The dollar is losing value exactly because of the position we are in. And it costs more to import anything, to vacation elsewhere, or to start or maintain international trade and business. We have a public which has not kept up with educational standards elsewhere and which does not nearly have the expertise to trade currency or deal with it. Americans also, up to now, have not learned foreign languages, do not understand foreign legal documents or shipping papers, etc. All that makes us dependent on others.

[noweknow]

It's time to go begging for more money.
President Obama, don't come back without change, you hear?
No, I don't mean "CHANGE" change.
I meant change. Lots of change, the more the better.
You know, the kind like the gold coins that make sounds in pants pocket.