The China Economy Challenge

January 19, 2011

Today President Obama and Chinese President Hu Jintao meet with 18 American and Chinese business leaders to discuss economic and trade policy. The meeting takes place amid an American domestic climate that increasingly sees Chinese economic power as a threat to America. A Pew Research Center poll found that “Americans by a margin of 60% to 27% think that China’s economic strength is more of a problem than its military might.” The US economy does face major challenges in the years ahead, but meeting them requires a can-do outlook and a firm grip on three core realities:  Economics is not a zero-sum game. Economic ties between the two nations have enormous potential to be mutually beneficial, but to do so China must play by the rules – and the Obama administration is pressuring China to do just that. China has seen tremendous economic growth but faces equally tremendous challenges of its own.  Finally, the most important thing to be done for the American economy is increasing American competitiveness in education, infrastructure, innovation, finance and trade – ensuring that the US flourishes and that businesses, workers and communities all benefit.

The administration bargains tough on the economy, with the aim of mutually beneficial growth. The U.S.-China economic relationship has great potential to benefit both sides and our economies rely on one another. As Treasury Secretary Timothy Geithner explained in a speech earlier this month, “the economic relationship between the United States and China provides tremendous benefits to both our nations.  Even though we compete in many areas, our economic strengths are largely complementary… We have a great deal invested in each other’s success.” Recognizing this, the U.S. continues to pressure China to ensure it plays by the rules of international trade, making progress on issues important to the Chinese contingent on progress on issues important to America. “Treasury Secretary Timothy Geithner has made clear that only when China makes progress on U.S. priorities-such as the reduction of trade and investment barriers, protection of intellectual property rights, and currency revaluation-will the United States make progress on Chinese priorities, such as the export of high-tech products and market economy status,” writes the Council on Foreign Relations’ Elizabeth Economy. The main issues of concern to the U.S. include:

Intellectual property. New York Times economics columnist David Leonhardt writes, “For the United States, the No. 1 problem with China’s economy is probably intellectual property theft. Technology companies, for example, continue to notice Chinese government agencies downloading software updates for programs they have never bought, at least not legally. No wonder China has become the world’s second-largest market for computer hardware sales – but is only the eighth-largest for software sales.” [David Leonhardt, 1/11/11]

Blocking the Chinese domestic market. Leonhardt continues, “Next on the list, say people who work in China or do business there, is the myriad protectionist barriers China has put up. These barriers make this country’s recent efforts at ‘buy American’ protectionism look minor league. In some cases, Beijing has insisted that products sold in China must not only be made there but be conceived and designed there. The policy goes by the name ‘indigenous innovation.’” [David Leonhardt, 1/11/11]

Trade. Brookings Institution Senior Fellow Eswar Prasad writes, “On trade, the Obama administration has taken an aggressive approach. It has instituted unilateral trade measures against a few Chinese imports and has also taken a number of challenges of China’s trade policy to the World Trade Organization. More recently, the U.S. has taken direct actions to protect the competitive interests of its firms… Such measures are intended to send a clear signal to China that the U.S. is willing to level the playing field by matching Chinese policies that run afoul of international norms and standards. With its actions and words, the Obama administration has signaled that it wants to deal with China on equal terms and will not back off from conflict where it feels that China is subverting the established rules of the game.” [Eswar Prasad, 1/17/11]

Currency. “China’s cheap currency undercuts tens of thousands of small-scale American manufacturers – companies that still make their products at home… While the renminbi, China’s currency, has risen 3.6 percent against the dollar since China loosened its link to the dollar last June, Mr. Lardy estimates that it is still undervalued by 15 percent to 17 percent on a trade-weighted basis,” writes the New York Times. [NYT, 1/18/11]

[Timothy Geithner, 1/13/10. Elizabeth Economy, 1/14/11]

China’s growth has been stunning, but the country faces significant challenges. Over the past 30 years, the size of China’s economy has grown to reflect the one-sixth of humanity who live there. But for that growth to continue, China must fix some tough problems. As the German Marshall Fund’s Daniel Twining writes, “China boasts the world’s second-largest economy, delivering double-digit economic growth on a seemingly permanent basis… It is the planet’s biggest steel producer, car market, commodity consumer and exporter… Yet China may soon bump up against the model’s limitations. An aging demographic profile means the population’s share of prime workers has already peaked. Resource constraints and environmental devastation will increasingly complicate economic development. Worried neighbors across Asia are moving closer to America and each other, challenging China’s room to maneuver in its region.”

Chinese leaders are debating these problems internally. Yu Yongding, a former high-level Chinese official in charge of economic policy, recently wrote in the state-run China Daily that, “China’s rapid growth has been achieved at an extremely high cost. Only future generations will know true price.” The costs he cites include rampant corruption, a widening income gap, pollution and an overreliance on the export sector to product jobs, among other issues.

[Daniel Twining, 1/13/11. Yu Yongding, 12/23/10]

The most important thing America can do to compete with China is get our own house in order. As Secretary Geithner has said, “the prosperity of Americans depends overwhelmingly on the economic policies we pursue to strengthen American competitiveness. Even as we work to encourage further reforms in China, we need to understand that our strength as a nation will depend, not on choices made by China’s leaders, but on the choices we make here at home.” CFR’s Elizabeth Economy seconds that point. “[Progress with China] will depend primarily on what happens at home, not only making smart decisions about R&D, education, and infrastructure but also creating incentives for investment in the United States. The United States shouldn’t blame China for where its economy is today, nor is China is responsible for where the U.S. economy will be tomorrow. Without rejuvenating its economy, however, the United States cannot remain a global leader.”

The Center for American Progress points to five core elements of domestic renewal and global competitiveness:

- “Modernizing our basic infrastructure to allow businesses to more effectively collaborate and compete in domestic and international markets

- Investing more in science and math education and workforce development to ensure we have workers able to participate in the technology-driven economy of the present and future

- Crafting finance policies to make more public and private capital available to innovators and bolster our culture of entrepreneurship by rewarding risk-taking and competitiveness

- Promoting international trade policies that ensure access to foreign markets, and the free flow of goods, services, knowledge, and capital across borders

- Honing our research and development policies so that we invest not just in basic research but also the full innovation lifecycle from invention, to development, to production and commercialization”

[Timothy Geithner, 1/12/11. Elizabeth Economy, 1/14/11. CAP, 1/14/11]

What We’re Reading

Saudi Arabia’s foreign minister says his country has abandoned efforts to mediate Lebanon’s political crisis.  

Haiti’s former leader Jean-Claude “Baby Doc” Duvalier has been charged with corruption and embezzlement during his 1971-1986 rule.

Arab nations formally submitted a resolution to the UN Security Council condemning Jewish settlement building in the occupied West Bank.

The Communist Party of Vietnam reappointed the country’s prime minister, Nguyen Tan Dung, for a second term at its five-yearly Congress.

India’s prime minister shuffled his Cabinet, juggling portfolios and replacing the sports minister after a corruption scandal involving last year’s Commonwealth Games.

Western diplomats are accusing Sudan’s government of stepping up its offensive in the remote western region while international attention is focused on the self-determination vote in south Sudan, with new U.N. figures indicating the Darfur conflict claimed more than 2,300 lives in 2010.

The African Union’s mediator for Ivory Coast said that his two-day visit had failed, while Swiss authorities moved to freeze immediately any assets belonging to the incumbent leader who refuses to cede power.

A major 7.2 magnitude earthquake struck a remote area of south-western Pakistan, causing widespread panic but reportedly few casualties.

The capture of an alleged leader of the insurgent Haqqani network in Afghanistan brings the number of captures since Dec. 1 to more than twenty-five.

On the heels a study that shows an increase in Reserve and National Guard suicides among troops who are in the United States and not mobilized, the U.S. Army hopes it can do a better job of preventing mental health problems in the ranks with more aggressive screening of troops — before they ship out to a war zone.

Commentary of the Day

Joe Cirincione explains that the U.S. strategy in Iran is working; as pressure builds on the regime, now is the time to emphasize to the regime the prospect for a negotiated solution that can guarantee its security and allow a resumption of normal diplomatic and economic relations.

Peter Beinart, citing Tunisia, writes that democracy may yet break out in the Arab world less because of American power than because, even if American power declines, democracy still has no compelling ideological competitor.

Robert Wright suggests the United States can stop footing the bill – and taking all the flack – for neutralizing security threats around the world by crafting instruments of global governance that will assure our security even in a world we don’t dominate.

 

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