Beyond brinkmanship: A better economic path for the U.S. and China

By Mohamed A. El-Erian
Friday, October 1, 2010

I suspect that the administration is pleased by the narrative on President Obama's meeting last week with Chinese Premier Wen Jiabao. By highlighting the extent to which a single topic -- the value of China's currency -- dominated this important occasion, the administration signaled greater seriousness about addressing the damaging problem of stubbornly high unemployment.

I also suspect that, while not happy to be told that their currency is undervalued, the Chinese authorities are satisfied with the other messages that were conveyed back to their country. The premier reminded his audiences here on several occasions that America must get its financial house in order.

This brinkmanship seemingly serves important objectives vis-à-vis domestic constituencies. But this approach could easily get out of hand. It is also not the best way to recognize U.S. and Chinese shared interests, nor will it lead to an outcome supportive of job creation.

It is in virtually no country's interest -- including that of the United States -- for China's economic development to derail. China is the world's strongest growth engine, its largest creditor and its biggest trade partner. Chinese products provide cost-effective solutions to the demands of consumers around the world, and China's continued willingness to exchange domestically produced goods for paper claims issued by other countries allows these countries to maintain economic activity well above what would otherwise be possible.

These are just the visible indicators of China's importance. With an emerging middle class that still consumes a remarkably low fraction of the income it earns, China offers the best potential for sustained, multi-year global growth. We should also not underestimate its global multiplier effect. Confidence in the ability to benefit from China drives success, self-confidence and economic growth elsewhere -- especially in emerging economies such as Brazil and in industrial countries such as Germany.

Simply put, the world cannot afford for China to stumble economically -- especially when many industrial countries face multi-year balance-sheet rehabilitation. To this end, America must resist the temptation of "China bashing," and China must resist diverting attention back to America's problems. Instead, both countries should collectively look forward, with two points playing a key role in guiding strategic interactions.

Yes, China is right to view itself as having worked very hard to bring millions of its citizens out of poverty and, in the process, have a positive overall impact on the global economy. But this does not mean that it can ignore the fact that distribution of the benefits and costs varies widely depending on where you live. The highest cost burden is carried in places where jobs have migrated to China, and prices of raw materials (copper, oil, etc.) for the factories that remain have been driven higher by increasing Chinese consumption.

For its part, America is right in reminding China that it has important global responsibilities. After all, China is now the world's second-largest national economy. But the administration must remember that China remains a relatively poor country; its per capita income ranks just 99th in the world. Indeed, as Nobel laureate Michael Spence has noted, this is the first time in history that a relatively poor country has acquired such global economic influence.

All this calls for resisting narrow brinkmanship on both sides.

Rather than be seen as lecturing China on its exchange rate, the United States should be doing even more to push its European allies to allow a larger Chinese voice in multilateral forums. This would engage China more, give it a greater stake and provide a better platform for its deeper global responsibilities. As an immediate step, the United States should be more aggressive in enhancing China's representation at the International Monetary Fund, where government actions still fall far short of what is required to reflect the new realities of the global economy, including China's role.

On its side, rather than lecture Washington about getting its house in order, Beijing should think carefully about how it can help the United States, and therefore the global economy, to bridge the hole of balance-sheet repair, building a better tomorrow for all. A first step would be to set more explicit principles to guide the two countries' interactions on trade, capital flows and asset-liability management.

It would be a mistake to underestimate the importance of greater strategic thoughtfulness on China-U.S. economic issues. It is in both nations' interest to resist the attraction of brinkmanship, which serves only very short-term and narrow domestic interests and does little to address genuine economic challenges. Broader views are also in the interest of the global economy. The longer the shift in emphasis is delayed, the lower the likelihood of the collective effort needed to restore the health of an interdependent and interconnected global economy.

Mohamed A. El-Erian is chief executive and co-chief investment officer of the investment management firm PIMCO and author of the 2008 book "When Markets Collide."

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