Obama’s opening speech set the stakes: "The relationship between the United States and China will shape the 21st century, which makes it as important as any bilateral relationship in the world." (emphasis added) The U.S., the world’s largest debtor, met this week with the confident leaders of its largest creditor, the communist government of China.
What took place over the last two days was hailed by Secretary of State Hillary Clinton as "unprecedented," the "largest gathering ever of top leaders from our two countries," addressing an "unparalleled" range of issues.
The American press, of course, was more focused on Sarah Palin’s departure than the Chinese arrival. Neither the New York Times nor the Washington Post managed a report on the discussions in the Wednesday paper.
This isn’t surprising since any conversations that were candid were private, and there was little of substance to announce.
But the exchange was revealing in its own way. President Obama, exercising his remarkable gift for presenting a sea change as a gentle current, laid out the fundamental challenge almost in passing:
Going forward, we can deepen this cooperation. ….And as Americans save more and Chinese are able to spend more, we can put growth on a more sustainable foundation — because just as China has benefited from substantial investment and profitable exports, China can also be an enormous market for American goods.
This has been Obama’s revolutionary message to the leaders of the world. The U.S. cannot go back to the old economy where we borrowed $2 billion a day, largely from the Chinese, to be the consumer of the world by living far beyond our means. We must consume less, produce more, and sell more abroad and balance our trade.
Therefore, the nations that have pursued export led growth — notably the Chinese, Japan, the Asian tigers, as well as Germany and others, will have to develop new strategies. The Chinese, the administration argues, will have to save less, consume more at home, and rely less on exports to generate jobs and growth.
This represents a staggering transformation that will require stark changes in policy across the world. The U.S. will need an industrial policy, a more aggressive trade strategy, higher top end taxes to reduce private consumption and balance our fiscal budgets, a smaller financial sector, and a dramatic change in our consumer driven and debt laden economy. The Chinese will need to develop a new social contract — health care, pensions, higher wages, paid vacations — for its workers, transform its domestic banking system, dismantle its mercantilist trade practices, invest massively in domestic infrastructure.
This is the right moment to undertake this necessary transformation. Trade has collapsed in the Great Recession. U.S. trade deficits have declined as exports and imports plummeted. U.S. consumers have gone from spending more than they earned to saving, as families struggle to recover from the trillions of wealth lost in the decline of home values and retirement savings. The Chinese have joined the U.S. in a major domestic stimulus plan, investing hundreds of billions in infrastructure and other projects to keep their economy moving and people working.
But are these elements of the crisis or responses to it? The obvious question is what are the policies that will drive this transformation as the economy recovers?
Here the Chinese were, even in the midst of diplomatic niceties, brutally clear. They plan to increase domestic demand, to move aggressively on energy efficiency. They believe the industrial countries should bear the burden of dealing with global warming, but are happy to capture the industries and technologies involved. They also want the U.S. to keep the dollar strong (read — will continue to undervalue their currency), and will sustain the mercantilist practices — from controlling access to their market, to formal and informal buy China policies, to buying or stealing technology — that have been central to their remarkable economic growth.
What is the U.S. strategy? President Obama suggested in his speech that "We can pursue trade that is free and fair, and seek to conclude an ambitious and balanced Doha Round agreement." And we can cooperate to transform our energy economies: "We can expand joint efforts at research and development to promote the clean and efficient use of energy; …And the best way to foster the innovation that can increase our security and prosperity is to keep our markets open to new ideas, new exchanges, and new sources of energy."
But this isn’t a new course — it is a return to the pieties and shibboleths of the old policies that helped make us the world’s largest debtor. The Doha Round offers nothing but a symbolic curtsy to the old trade dialogue. "Joint efforts at research and development" are fine, as long as we realize that the Chinese will use the technology, limit access to their market, and aggressively try to capture the export markets in solar, wind and next generation to come. Keeping "our markets open to new ideas, new exchanges, and new sources of energy" sounds good, but ignores the extent to which the Chinese seek to control access to their markets and ours.
This is not a serious policy agenda; it is the noblesse oblige of a wealthy nation unwilling or unable to understand how deep a hole it is in, and how much it has to change.
If Obama’s agenda seemed musty, Treasury Secretary Geithner’s seemed oblivious. What are the "structural policies" to lay the foundation for "a more sustainable and balanced trajectory of growth"" According to Geithner, they’ve largely already happened. "We’ve already seen a pretty substantial increase in private savings. Our current account and balance has fallen sharply." And we’ll move to reduce our public deficits once the economy gets going.
But we ran budget surpluses under Clinton and still racked up rising trade deficits and foreign debt. Recession isn’t really a sustainable answer, we hope. Perhaps the shock of the Great Depression will make affluent Americans — those who make over $100,000 a year and account for over half of all consumption — buy less. But if the economy does come back, will personal austerity be sustained? (And if it is, how will the economy come back?). The tarnished icons of the Wall Street — Goldman Sachs and JPMorgan — reveal the lure of the old ways. Although still dependent on public subsidies, they are already back to high leveraged, computer driven gambling, and pocketing millions in bonuses from trading profits.
As for China, Geithner’s summary remarks at the end of the discussions recycled the boilerplate of the old era:
We reaffirmed our very important commitment to an open, rules-based, multilateral regime for trade and investment. We reiterated our commitment to avoid protectionist measures to bring about a success — and to bring about a successful conclusion to the Doha round. China and the United States committed to treating firms with foreign ownership operating in our markets exactly as we do domestically owned firms when it comes to government procurement.
Nonsense. China has progressed largely by ignoring the rules that got in its way. It has developed — as the U.S. did as a rising power — by skillful use of mercantilist trade policies. Ask European manufacturers of wind turbines with plants in China how committed China is to treating "firms with foreign ownership operating in our markets exactly as we do domestically owned firms."
No one expects public remarks to be candid. But papering over differences is a far remove from suggesting that black is white.
So what do we make of these "unprecedented" talks with the "most important bilateral relationship in the world?" The private discussions with the Chinese leaders no doubt were far more candid and far tougher than the public statements. We can be thankful that Obama has put before the Chinese and the world the reality that the U.S. cannot go back to being the consumer of the world on borrowed money.
But what is most apparent is that the Chinese have a policy that has worked well for them thus far. They will evolve according to their own interests. What isn’t apparent is whether this administration has a policy to get us where it sensibly says we must go. Embrace of Doha and platitudes about "open, rules-based" trade, ritual denial of reality surely won’t get us there.