For the first time in centuries, China affects the global economy as much as it is affected by the global economy. In the years ahead, China is likely to account for between one-third and one-half of growth in global incomes, trade and commodity demand, and its significance will only increase as its share of the world economy rises.
I returned last week from a trip to China with the dispiriting conclusion that the world lacks shared understandings regarding goals for the evolution of the Chinese economy, the objectives of China policy in the short and medium terms, and the institutional structures needed to manage both cooperation and inevitable tensions. Chinese President Xi Jinping has rightly called for a “new type of great-power relations .” But it must be embedded in, if not a new international economic architecture, then a substantially revised and updated one.
The first issue on which clarity is required is whether it is the objective of the United States and the global community to see China succeed economically as a support for global prosperity and a driver of positive social and political change, or whether it is our objective to contain and weaken China economically so that it has less capacity to mount global threats. This is seen in Beijing as a live question and is in fact a matter of debate beyond the shrill rhetoric of protectionists and politicians. The Council on Foreign Relations, hardly a source of xenophobic or radical ideas, recently issued a report drafted by leading U.S. diplomats condemning this country’s efforts to build up China within the international economic order and calling for a “balancing strategy” that includes “new preferential trading arrangements . . . that consciously exclude China.” No small part of the case being made by the Obama administration for the Trans-Pacific Partnership (TPP) trade deal involves the idea that it will promote competitiveness vis-a-vis China and reduce China’s influence in determining global trade rules.
The world cannot expect economic cooperation from Beijing if its objective is to inhibit Chinese economic performance. As Xi’s rapturous recent reception in London illustrates, the United States may isolate itself from traditional allies if it does not cooperate economically with China. If Chinese economic performance deteriorates substantially, as is certainly possible, there is a risk that a balancing strategy will invite a hostile nationalist reaction. None of this is to say the United States does not have valid concerns about China’s behavior in the economic arena or to deny that these should be addressed vigorously. It is to say that our objective must continue to be mutual growth and prosperity.
Second, China faces fundamental economic policy choices in which the whole world has a great stake. It is unfortunate that difficulties with China’s economic statistics, illustrated by a newly discovered 17 percent error in estimating its coal consumption, make it difficult for observers to understand China’s economy.
At a time when the Chinese economy is slowing and Chinese wealth holders desire to diversify their assets outside the country, it is incoherent to favor both financial market liberalization, with more reliance on market forces, and exchange rate appreciation, as some in the United States do. The reforms that are necessary if China is to grow sustainably and strongly over the next decade — steps such as closing unprofitable state enterprises and limiting the ability of local governments to borrow and build on an immense scale — will surely take a toll on growth in the short run. This, in turn, will reduce demand for imports from the rest of the world and raise China’s trade surplus.
Reasonable policy dialogue requires a recognition that is not present of the tensions between short- and long-term and national and global interests. The world is likely to be well-served by recognizing that its deepest interests lie in China pursuing more rather than less reform, even at the expense of modest reductions in China’s contribution to global demand over the next couple of years and possibly more exchange rate depreciation than we would prefer. This puts an even greater premium on the industrialized world finding an effective growth strategy based on increased public and private investment.
Finally, there is the question of institutional architecture. The emergence over the last year of a major Asian trade integration effort (the TPP) in which China does not participate and a major financial institution (the Asian Infrastructure Investment Bank) in which the United States does not participate is hardly auspicious. Worse, the United States’ failure to provide the necessary congressional approval to allow China’s voting power in the International Monetary Fund to rise above that of Belgium’s suggests a troubling indifference to global reality. Forums and institutions in which both the United States and China have appropriate roles are urgently necessary if the global economy is to get back on track.
In “The Economic Consequences of the Peace,” John Maynard Keynes asserted the primacy of economics, observing that “the perils of the future lie not in frontiers and sovereignties but in food, coal and transport.” His call for strong polices directed at promoting mutual prosperity and cooperation went unheeded, with catastrophic consequences. Today the perils of the future have much to do with China’s rise and with the worlds of commerce and economics. Let us hope that we find the wisdom to manage them well.