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U.S. and China on a collision course
Philip Bowring International Herald Tribune

WEDNESDAY, APRIL 27, 2005
HONG KONG 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 national dignity.
 
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.
 
 
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