Hubris and myopia on both sides are pushing China and
the United States toward a confrontation over trade from which the
rest of the world will be an equal loser. The issue may be less the
stuff of headlines than the China's furor over Japan's past and
future roles in Asia. But that is an issue which, at least in the
short run, can be turned on or off.
The trade problems go
deeper - to the heart of politically driven economic policy
misconceptions. As a result both countries' economies are, for now,
growing at rates that are unsustainable and are storing ever bigger
problems for the future.
Let no one mistake the
dangers when both parties in the U.S. Congress take aim at China
trade in a way that could threaten the whole WTO structure and when
China makes the issue of its currency value into a matter of
China has consistently
failed to grasp the currency nettle despite years of promising a
more flexible policy and after more than two years of growing
international disquiet about global imbalances arising in part from
currency misalignments of which the yuan is the most significant.
China's success has blinded it to the dangers of international
reaction against its trade and currency policies.
There has been a mix of
reasons for China's failure to change: bureaucratic inertia, an
indecisive new leadership, fear of the impact on employment and the
financial system. But the most important factor now seems to be
reaction against U.S. pressure. Nationalism has been on the rise as
China's pride has been swelled by foreign adulation.
Unfortunately for China
there is now no way that it can continue on a course of reliance on
a U.S. export market which, one way or another, is likely to be cut
back to bring the trade gap down to sustainable levels.
China too must recognize
that while its exports have helped power remarkable economic growth,
they have built up domestic as well as international problems. The
fixed exchange rate and gargantuan surplus have propelled excessive
monetary growth and a level of fixed asset investment that exceeds
that in southeast Asia before the 1997 crisis.
The massive industrial
and infrastructure overcapacity now being built seems sure to
produce a collapse in profits, another surge in nonperforming loans
and a sharp decline in investment and growth. These could hit just
at the time when China is finding severe headwinds, if not outright
barriers, in the United States.
As for the United
States, its assumption that it can have continuous 3 percent GDP
growth based almost entirely on other nations' savings is even more
remarkable. The buyers of U.S. debt - mostly Asian central banks -
have helped sustain U.S. illusions about its economic prowess. More
the fool they. But the United States itself is mainly to blame for
abusing the role of the dollar to buy growth. China is right that
the trade deficit is a U.S. problem that will not be solved by a
yuan revaluation. Indeed it could make it worse and create
inflation, not jobs, in the United States.
Nothing but a rise in
savings - which means a sharp fall in consumption - can solve the
deficit problem. In other words, the United States must face up to
the necessity of a recession or prolonged minimal growth if balance
is to be restored. Policies under Bush/Greenspan have delayed the
day of reckoning. But it is coming.
This is not just
politically unpalatable at home. U.S. attitudes to its foreign
partners are either not-so-benign neglect, or assume that the United
States is doing the world a favor by sustaining its consumption
binge. In fact the imbalances are now threatening the trade system
and dollar dominance which have been such successful ingredients of
U.S. policy for 40 years.