"When the center of the global economy shifts, logically, the world intellectual center must shift as well. This institute will be a new think tank for the new Asian Century."
Thus spoke HSBC CEO Stuart Gulliver last night at Hong Kong's Conrad Hotel, where the inauguration of the new Fung Global Institute was celebrated by 200 global movers and shakers, including former Federal Reserve Chairman Paul Volcker, former Hong Kong Chief Executive Tung Chee Hwa, and Institute founders and Li and Fung Corporation Chairman and CEO respectively Victor and William Fung.
As the dinner speaker, Volcker backed Gulliver's sentiment and called on Hong Kong and China to lead the way in overcoming U.S. resistance to adoption of the Volcker Rule (banks with implicit or explicit government guarantees because they hold insured accounts or are too big to fail would be prohibited from doing proprietary trading) by setting the example with immediate adoption in their own markets. He emphasized that the global financial system is sitting on a knife edge without a coherent and consistent set of international or intersecting national regulations on dealing with what is now a $700 trillion global market in derivative instruments that no one understands. In the face of dithering and caviling in the West, maybe, suggested Volcker, the East could start talking sense.
Of course, as Chairman Victor Fung emphasized in his own opening remarks, Asia is a vast, diverse space and no single institute can be its sole voice. But he voiced the intent for the institute to provide Asian perspectives on the key issues facing not only Asian but all global leaders. For that purpose, he presented an all star cast of fellows, advisers, and staffers. These include Nobel prize winning economist Michael Spence, institute President and Peoples' Bank of China adviser Andrew Sheng, former Chairman of the China Bank Regulatory Commission Liu Mingkang, and former World Bank chief economist for China Louis Kuijs.
In that spirit of presenting Asian perspectives to the world, the current crisis in Europe was the focus of much of the inaugural discussion. Commenting on the major challenges facing Asia, Gulliver placed the euro/EU problem first on his list saying that "the key now is the eurozone and calling on the Europeans to establish a Europe wide bank deposit insurance guarantee in euros along with a euro-bond and a fiscal concordance. However, as evidence of the differences in Asian perspectives, former Singapore Foreign Minister George Yeo took a much more relaxed position, arguing that more integration cannot be the answer for Europe and that it should perhaps not strive too hard to sustain what may well be unsustainable. Attractively out of the box in concept, this idea was quickly countered by Spence and others who emphasized that a collapse of the EU would have dire consequences for Asia and America because it is the biggest export market for both regions.
There was, however, unanimity of perspectives in one very important and perhaps defining respect. At a moment when the former head of a private equity firm (Mitt Romney) -- a firm dedicated to maximizing relatively short term profits for shareholders as its sole business objective -- is running to become president of the United States, Victor Fung emphasized that "any individual business has no right to exist if its objectives do not coincide with those of the society it serves." He further called for business to promote full global employment, social justice, and the interests of stakeholders.
That is certainly a different perspective -- a strongly Asian perspective -- from the dominant shareholder value/fiduciary obligation philosophy of U.S. business leaders and thinkers. The importance of that difference was suggested by Fung at the end of his remarks when he warned of a clash of civilizations if dialogue and debate cannot reconcile strongly differing perspectives.
Avoiding such a clash and promoting a truly equitable, sustainable, and prosperous global economy is the gargantuan task the Fung Global Institute has set itself. I sincerely wish it luck.
The recent U.S. Commerce Department recommendation for imposition of substantial anti-dumping duties on imports of solar panels from China has opened the spillway for a flood of debate over the wisdom of such action.
This is not a surprise. It happens every time the U.S government does anything to uphold the rights of domestic producers. The usual suspects make the usual arguments. The anti-dumping duties will raise prices to consumers thereby causing inflation and dampening market growth. The business of the installers of the dumped products will suffer and there may be fewer installation jobs. The United States provides many financial incentives similar to those available in China. The Chinese have a real cost advantage because of the scale of their production and their low labor costs, and they are therefore not really dumping. But if they were dumping, the anti-dumping duties will make no difference because of their inherent cost advantage. Imposition of the duties may trigger a trade war and the Chinese will retaliate with their own anti-dumping duties or other measures.
Although I've heard them a million times, I never cease to be amazed at these arguments because of their implicit assumption that the U.S. decisions in these matters are primarily a matter of discretionary trade policy. The argument is always cast as if the U.S. government is acting gratuitously in ways to harm its own economy and citizens by attacking innocent foreigners.
This is, of course, decidedly not the case. The U.S. constitution guarantees the right to hold property and the power of the state is committed to preventing theft of private property. That is the fundamental basis of our free market, democratic, capitalist system. One can enter into extended discussions about the various kinds of dumping activity, and about how dumping is calculated, and about abuses of the anti-dumping laws. But the laws have been there for some time and are there for a reason. Nor is the United States the only country that has and uses anti-dumping laws. Virtually all countries have and use them and they are fully incorporated into the rules of the World Trade Organization and of all the other free trade area and bi-lateral free trade agreements. The reason this is so is that dumping is a classic method of theft. It was particularly virulent during the Great Depression when countries engaged in competitive currency devaluation in order that their exports would be priced less expensively than those of competing exports from other nations. The reason everyone wanted cheaper exports was because exports generated jobs and everyone desperately wanted jobs. So each country tried to steal the jobs from other countries by artificially reducing its prices through constant devaluation. The International Monetary Fund (IMF) was created after World War II precisely to prevent this from happening in the future.
Dumping occurs when a product is sold in a foreign market below its cost of production and/or below the price at which it is sold in the home market. It is illegal under the laws of the United States and most other countries and also under the rules of the WTO because it is understood to be a form of theft. When a product is illegally dumped in the U.S. market at an artificially low price, the buyer of the product may feel that he or she is getting a great bargain. But the domestic producer of the competing American product feels that his or her livelihood is being stolen and the United States doesn't sanction theft even if theft might help some people. Look at this way. Suppose I steal your new Rolex watch and sell it to friend for $100. It's a great deal for my friend and I also make money. You have lost your watch, but look how great that was as a way to stimulate the economy. Somehow it doesn't sound right when you say it that way, does it? It doesn't sound right because it isn't right. In fact, it strikes at the heart of the very private property rights necessary to maintain the capitalist, democratic, free market system.
The U.S. government doesn't have policy discretion in these matters nor should it. The law says dumping is illegal and provides for petition and redress by and to those who believe they are being harmed by dumping. Upon receiving a complaint, the Commerce Department must review the complaint and determine if there are sufficient grounds for an investigation. If so, it must investigate. If the investigation finds illegal dumping taking place, the department must act as if theft is underway and recommend measures to stop it. That means recommending imposition of anti-dumping duties. But just to make sure that there is a real need to act, the law requires the independent International Trade Commission (ITC) to review the Commerce recommendations and to determine if actual injury is taking place before duties are imposed. In other words, it's possible that dumping is taking place but that no jobs are being lost and that no one is suffering. If so, the ITC halts any imposition of anti-dumping duties. Only if it finds significant injury does the ITC allow the duties to actually be imposed.
The point is that the law is there to defend private property and that it has many safeguards built in to protect consumers as well.
As the European Union slips inexorably further into crisis and perhaps recession, the negative impact on the United States is inevitably going to be substantial. At the same time, slowing growth in China, South America, India, and elsewhere will also have an important impact.
The whole world will now be reemphasizing export led growth and the favorite target market place will be that of the United States. Among the G-20 nations, only America will be without a comprehensive growth strategy. The likelihood is that the U.S. trade deficit will rise significantly while unemployment remains high. This is, of course, not necessarily a winning political formula for the U.S. presidential election.
Both President Obama and Republican candidate Romney need to articulate a serious growth program that goes beyond the standard talking points on stimulus and cuts in government spending. I'm going to help them by outlining here a few key ideas of what they might propose.
Given the high level of U.S. government debt and of the federal budget deficit, further stimulus is bound to be limited, whether it be as a result of tax cuts or of increased spending. Thus the main avenue to growth must be through reduction of the U.S. $800 billion trade deficit. This can come from a combination of importing less and exporting more. America can produce more of what it consumes and export more of what it produces. The program is very simple and straight forward.
The most important step will be for the candidates to articulate that their top national security priority, more important than Iran's nuclear program or the so-called Pivot to Asia, will be to produce and provide tradable good and services from an American base. Make it in America. Provide it from America. Those must be the touchstones of the new national strategy.
In recent months it has become clear that there is already a trickle of manufacturing and industrial activity coming back to the United States from Asia. Booz &Co. along with the Boston Consulting Group, have done analyses demonstrating that production in a wide variety of industries can increasingly be done competitively from an American base, at least for purposes of supplying the American market. To further stimulate that trend, U.S. corporate taxes should be made competitive with those of other leading countries. This means rates should be somewhere between 15 and 25 percent.
The United States is the only major country without a Value Added Tax (VAT). Because this tax is rebated on exports to the United States and added on to the price of U.S. exports to countries having a VAT, the tax currently acts as a subsidy for imports into the U.S. market and as a tariff on U.S. exports to foreign markets. This situation must be corrected by adoption of a VAT by the United States.
Washington needs to announce that it will selectively match the targeted investment incentives offered by the likes of Singapore, China, and France to attract investments in targeted industries like biotech and semiconductors. What I mean here is not that the U.S. has to proactively offer these things, but it needs to offset the offers of other countries that are aimed at drawing the production out of America. At the same time, the U.S. could propose negotiating disciplines in the WTO on such offers.
Similarly, Washington must have a policy of countering currency manipulation. For example, Japan recently intervened in currency markets to weaken the yen as an aid to Japanese manufacturers, and especially auto manufacturers. China, Brazil, Korea, and others routinely engage in such actions which tend to act to the disadvantage of U.S. based production. Again, U.S. counter-policies could be coupled with calls for negotiation of international disciplines on currency manipulation.
Jawbone, jawbone, jawbone. No executive should ever leave the president's presence or that of a presidential candidate without being asked when he or she is going to invest and produce more in America. When executives are in China, all they hear is the question of when they are going to put production and R&D into China in order to maintain a good image there. They need to hear the same refrain in America.
Investment in infrastructure, creation of an infrastructure bank, and dedication to keeping the United States at the cutting edge of infrastructure will be essential. For example, Korea's advanced high speed Internet infrastructure means that certain kinds of R&D can only be done there. The United States must be able to match this capability.
America must adopt labor-government-business cooperation similar to that of Germany, Scandinavia, and Japan. There should be regular consultations and discussions among these three key entities on how to make and keep America competitive. Joint setting of national objectives and undertakings to keep budgets, inflation, and investment on target will be extremely valuable.
Support for R&D and development of pre-competitive technology by government has always been a major pillar of U.S. competitiveness. The success of the Agricultural Extension Agencies, of the Defense Advanced Research Projects Agency (DARPA), and of Sematech and the National Science Foundation must be maintained and extended.
President Obama has set a target for doubling exports. Nothing wrong with that, but if exports double while imports triple, nothing will have been gained. Both Romney and Obama should announce that they will set targets for balancing trade. With no trade deficit, America would gain 4 to 5 million jobs with no need for debt funded stimulus programs.
This nine point program, if adopted, would assure U.S. economic vitality and leadership for a very long time to come.
ADEM ALTAN/AFP/Getty Images
Quick, who's Herman van Rompuy? Ah, I caught that pause as you struggled to remember that he's the president of the European Council and sometimes mistakenly called the president of Europe for which he is nevertheless the closest embodiment for such a thing that Europe has.
A veteran of the endless negotiations of Belgium's linguistic politics, he is little known and little regarded. Indeed, it is precisely because of his anti-notoriety and lack of charisma that he was chosen for his post by the top European national leaders like Angela Merkel and Nicolas Sarkozy who wanted nothing less in the European Council Presidency than a strong personality who could challenge their pretensions to leadership.
Nevertheless, as the European leaders meet today for an informal summit in Brussels to deal with the metastasizing cancer of the euro and the European financial structure, van Rompuy's hour has struck. The dithering, small minded, self-regarding, narrowly nationalistic indecision of the heads of the major European states has given van Rompuy his chance actually to act like and perhaps become, at least in spirit, the real president of Europe.
Since the European crisis first broke upon the scene two years ago, the talk has been of financial firewalls, austerity, European Central Bank (ECB) lending limits, euro bonds or no euro bonds, of who will pay for what and of one nationality not paying for the sins of another. It's all been what we in America would call "nickel and dime stuff", small potatoes that have little or nothing to do with the main point.
The European Union was never conceived of as primarily an economic project. From the start it has always been fundamentally a political project aimed at uniting Europe, smothering its insecurities and jealousies, and preventing for all time any more suicidal European civil wars. At the critical moments in the evolution of the EU, the primary considerations have always been political, social, and strategic, not economic. Think, for instance, of the moment of the fall of the Berlin Wall and the opening of the possibility of the reunification of Germany. Economically, the prospect was not all that attractive. The integration of the relatively poor East Germany into the West German and EU economies was going to be difficult and expensive under any circumstances. But to make it possible politically required that the integration be done on the basis of valuing the East German currency at par with the West German D Mark even though it clearly had no such real value. Did then West German Chancellor Helmut Kohl hesitate? Did he stop to ask whether other Europeans might balk at the higher interest rates they would have to pay as part of their contribution to German reunification? For that matter, did the other Europeans balk? Did Francois Mitterand hinder or help reunification? What did U.S. President George H.W. Bush do? They all supported the move, costs be damned.
Today, van Rompuy is in the perfect position to recall this history to those gathering in Brussels for what well may be the last chance to find a way to hold the great European project together.
In doing so, he must appeal particularly to German Chancellor Angela Merkel and her German colleagues. While the focus has been mostly on Greece over the past two years, the problem has been mostly in Germany. The Germans seem to have forgotten that the rest of Europe paid a high price to help facilitate German reunion. The Germans also seem to have forgotten that it is they who have been the big winners from the EU and the euro. The EU made Europe safe for Germany or perhaps we should say it made Germany safe for Europe. Either way, it has been a major boon for Germany. The euro has been a godsend for Germany. By dint of being entwined with the other economies of Europe, the euro is undervalued as a purely German currency. The Germans have been telling themselves how hard they work and how they stint and save and strive to be competitive. But they have been overlooking how easy it is to be competitive when you have an undervalued currency. The great German export machine and the accumulation of the chronic German trade surplus and the high rate of German employment and the high German standard of living all owe much to currency undervaluation and certainly to the ability to sell easily in the world's largest integrated market -- the EU.
Van Rompuy needs to remind the Germans that it is not the future of Greece that is now on the line. It's the future of Germany, and of the rest of Europe. It has been blindingly obvious from the beginning of the crisis that the solution is more, not less, Europe. The founders of the euro knew that a single currency without a single finance and tax authority was not a long term proposition. They bet that the evolution would be toward centralization of those functions at the European level. The details are not important, but one way or another there must be a European bond, a central backer of the European banking system.
To paraphrase Benjamin Franklin's famous remark at the signing of the American Declaration of Independence, "now the Europeans must hang together, for, if they do not, assuredly they will all hang separately."
That's the phrase or something like it that van Rompuy must find and use it to seize the day for the European project.
French President Francois Hollande and German Chancellor Angela Merkel, who held their first meeting yesterday, might want to consider that they have been attacking the problems of Greece, the euro, Spain, Portugal, Italy, and even France backwards.
All the talk and all the effort has been aimed at keeping Greece and the others in the euro. But the real, ideal solution is to get Germany out.
It's simple. Because of Germany's great international competitiveness and the fact that it is the largest euro zone economy, the euro is much stronger than it would be if it were the currency only of a euro zone minus Germany. On the other hand, because of the drag of the competitive weakness of the rest of the peripheral euro zone countries, the euro is too weak for Germany which consequently racks up chronic trade surpluses both within the EU market and in the external world markets.
Prior to the advent of the euro, the rest of the EU countries maintained their competitiveness and living standards vis a vis Germany by steadily devaluing their currencies against the D Mark. The adoption of the single currency, of course, put a halt to that. In the past two years, the effort of the EU has been to raise the competitiveness of the peripheral countries by reducing their unit labor costs through the imposition of austerity measures aimed at making the rest of Europe more like Germany.
But this is only causing these economies to implode as their politics explodes, and as this happens, the euro is steadily weakening and making Germany even more competitive. At the same time, even though the Germans have leeway to increase wages and consumption and public spending in a way that might relieve the pressure on the rest of Europe, they are not doing so. Effectively, Germany is telling Europe, "it's my way or the highway."
The political, economic, and national security implications of this path are seriously disastrous. Greece has become virtually ungovernable, Spain has over 50 percent youth unemployment, the extreme right and left of France control 30 percent of the vote between them, and the Swastika is again being flown in parts of the old continent.
The much easier and much more logical solution is that suggested by Washington financier and hedge fund manager John Prout -- get Germany back to the D Mark. At one fell swoop, the remaining euro zone countries would become competitive via devaluation of the euro versus the D Mark, and this without the grinding pain of austerity. The pressure and need for a giant rescue fund would disappear. At the same time, Germany would lose its somewhat artificial competitiveness and would automatically have higher income, consumption, and inflation as a consequence of a D Mark that would be stronger than the present euro.
I know it sounds radical, but it really is time for outside the box solutions.
You may remember that the U.S. government and the global media uniformly hailed the progress achieved at the U.S.-China Strategic and Economic Dialogue completed on May 4 in Beijing. China's agreement to allow foreign financial firms to increase their share of ownership of Chinese firms from 33 percent to 49 percent was cited as a major element of this progress.
So why was there no announcement of regression last week when Beijing suddenly announced that the China branches of the Big Four global accounting firms must be headed by Chinese nationals and have 80 percent of their accountants be Chinese nationals within five years? In view of a recent string of accounting scandals that have raised serious international doubts about the quality of Chinese auditing, this is only likely to complicate the task of understanding what is really going on in China. What difference does it make to own 49 instead of 33 percent if you don't have any idea of what you own?
Much more important than this, however, was the release last week of the March trade statistics which showed that the U.S. trade deficit for the month jumped 14 percent to $51.8 billion as imports rose 5.2 percent to a record $238.6 billion. On an annual basis the trade deficit is on track to rise by 7 percent to over $600 billion or about 4 percent of GDP. In view of the fact that economists generally consider any trade deficit over 3 percent of GDP to be unsustainable for the long term, this increase is a seriously troubling development. The more so because President Obama recently emphasized that his administration is on track to reach its goal of doubling U.S. exports over five years.
He is correct. Indeed, the March export performance was quite good with total exports up 3 percent and shipments to Europe rising over 11 percent to an all time high of $25.1 billion. Great, except that imports from Europe were up by more than 22 percent to an all time high of $35 billion.
I hate to have to keep saying this, but the president's goal of doubling exports is a stupid, meaningless goal as long as imports are absent from the equation. The only meaningful goal would be a goal to cut the trade deficit in half, or, better yet, to eliminate it all together. That would mean not only exporting a lot more but also importing relatively a lot less and producing domestically a lot more of what we consume. That's what rebalancing has to mean. We will not be able to rebalance simply by exporting more.
In this context, one development last week was most disheartening. California's BART (Bay Area Rapid Transit) system has been considering bids on 775 new light rail cars. Of the two final bidders, Canada's Bombardier came in at $1.54 billion versus $1.72 billion for Alstom of France. But the French company was promising 95 percent U.S. content while Bombardier could only offer 66 percent U.S. content, meaning that its bid would actually create fewer jobs and add less to the U.S. economy than that of Bombardier. BART announced that it will be going with the Bombardier bid. Alstom is offering to revise its bid which it says is a perfectly valid procedure under the terms of the bidding contracts. But it is not clear that BART will go along with that.
Of course, one can sympathize with BART since the Bombardier bid would save it money. But for the U.S. and California economies, it would be nice if Alstom could get its price down while maintaining its high U.S. content offer. Someone in a high place should be leaning on BART to let Alstom revise the bid.
Otherwise this will become another example of the problem of demand leakage. Paul Krugman is out with a new book called End this Depression Now. In short, it argues that there is not enough demand in the U.S. economy and that government should step in to correct that with a good old Keynesian stimulus program to pump up demand and consumption. The notion is that if consumption rises, it will spark more production to meet the demand and the new production will create jobs and prosperity. The problem with this is that if the consumption is primarily of imports then the demand leaks out of the U.S. economy to places like Japan, South Korea, Germany, and China. If we pump up demand only to have it supplied from abroad, our problems will only get worse. The great problem of the U.S. economy is not so much a lack of demand as a lack of production. Were our trade in balance instead of in deficit, unemployment would be at about 4 percent.
Which leads to my last point. An industry that should be booming in the United States is that of solar panels. I don't mean installation of solar panels. That is booming. I mean production of solar panels. The United States has a huge market. The industry is not labor intensive like apparel or shoes. Rather it is more technology and capital intensive like semiconductors and steel. It is the kind of industry economists say America should be good at. In fact, America is good at producing solar panels. But China has been both directly and indirectly subsidizing its industry heavily as part of its targeted industry strategic development program. Chinese products have been aggressively dumped into the U.S. market with the result that the U.S. based industry is barely holding on.
The president has said he will insist on a level playing field for U.S. industry and has said that America always wins when the playing field is level. Well, this week is the week when the administration must decide how to respond to China's industrial policy for solar panels. This decision will tell us whether Obama means business or whether all the activity around the creation of a trade enforcement unit is just a mirage.
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In an attempt to recover from its bumbled handling last week of negotiations over the blind Chinese dissenter, Chen Guangcheng, the Obama administration was at pains over the weekend to present the results of its concurrent Strategic and Economic Dialogue as a resounding success that will rebalance U.S. -China trade, spur U.S. exports to China, and stimulate U.S. job growth while turning China into a U.S. style consumer paradise.
Amazingly, U.S. media like the Wall Street Journal, New York Times, and Washington Post, that had done an admirable job of uncovering the administration's Katzenjammer Kids approach to Chen, swallowed the economic success story hook, line, and sinker. All ran triumphal Sunday stories essentially parroting the great progress line being promoted by administration spokespersons. This is even worse nonsense than Hillary Clinton's line that the deal over Chen was "his wishes and our values."
To understand fully just how bad the whole week was, let's go back to the original Wednesday announcement of a deal that had Chen going to Chaoyang Hospital in Beijing to be reunited with his wife who had been brought from the Shandong village out of which he had made his earlier escape. This was when Clinton made her wishes and values statement, and that story was accompanied by pictures showing U.S. Ambassador to China Gary Locke and Assistant Secretary of State Kurt Campbell holding Chen's hands as they accompanied him to a limo for the drive to the hospital. They were widely described in the press as America's most experienced and savvy diplomats. What wasn't clear but subsequently became so was that the deal had been hastily put together in order to prevent the Chen issue from impinging on the Strategic and Economic Dialogue scheduled for Thursday and Friday. The administration had half the U.S. cabinet and some 200 top officials coming for those talks and the last thing it wanted was a breakdown.
In their haste, however, the top diplomats made it clear to Chen that if he didn't leave the haven of the U.S. embassy for the hospital controlled by Chinese security forces that his wife would be sent back to the tender mercies of the local goon squads in Shandong. Maybe this wasn't a threat, but nor was it a show of friendly support. Moreover, the top diplomats failed to achieve any continuing presence at the hospital or any way of assuring continued good treatment for Chen. They and he were now at the mercy of the Chinese security forces which is why Chen got scared and things began to break down. Eventually, of course, a new deal was apparently worked out to let Chen come to America to study law. Whether and how this will actually work is still unclear.
What is clear is that a great sigh of relief went up from the U.S. delegation when the Chinese proceeded to move ahead with the Strategic and Economic Dialogue on schedule. There had been concern that they might postpone or call the whole thing off in response to the U.S. handling of Chen.
Perhaps out of gratitude and certainly to prove to themselves that it had all been worth the effort, the U.S. team then proceeded to present the Dialogue as an outstanding success -- one obviously worth the ambiguity with Chen.
So of what did all this success consist? According to the Wall Street Journal, China agreed to consider making changes to boost domestic consumption, to rely more on domestic consumption than investment or exports for growth, to boost dividends paid by state owned companies to the national treasury to support social spending that arguably will enable Chinese consumers to spend more of their earnings instead of saving, and slightly open the Chinese economy to additional competition.
For instance, foreign financial firms will now be allowed to increase their stake in Chinese firms to a maximum of 49 percent from the current 33 percent. There was also agreement to consider reducing some of the favorable export financing provided to Chinese exporters and thereby bring China's practice into conformity with global standards. China will also give consideration to removing or reducing advantageous financial and regulatory standards for state owned enterprises. And, although there was no Chinese commitment of any kind on currency valuation, Treasury Secretary Tim Geithner could not repress the urge to point out that the yuan has appreciated by 13 percent in real terms over the past two years.
Some of this may indeed be useful, although Chinese and American analysts differ about the likely effects. Americans think increased Chinese consumption will boost U.S. exports and jobs. The Chinese don't believe that but think the increased consumption might make for more balanced and stable domestic growth. But in any case none of it is game changing in the least, partly because, as the Journal's Bob Davis was quick to note, none of the agreements to consider doing various things are at all binding on Beijing, or the United States for that matter.
More important, however, are the questions of framework, direction, and impact on long term wealth creation and power. Clinton could not repress a telling burst of clichés. "Our countries," she said, "have become thoroughly, inescapably interdependent." And, "the United States believes that a thriving China is good for America, and a thriving America is good for China."
I guess, she has to say that, but why does she particularly want to celebrate this interdependence? China is clearly doing its best to become less interdependent. And is it true that a thriving China is good for America and vice versa? Well, it may or may not be true. It depends on circumstances. And Clinton's job is quintessentially to assure that circumstances in China are favorable to making America thrive and perhaps making America less interdependent.
At the moment, the circumstances are such that most of the incentives in the U.S. -China relationship are to move the production of tradable goods and the provision of tradable services and the related jobs out of the United States to China. Under those circumstances a thriving China does not necessarily result in a thriving America. What are those incentives? Regardless of Geithner's praise of the revaluation of the yuan in real terms, it is still undervalued. Moreover, the markets know that the Chinese can and will increase the undervaluation whenever it suits them.
So the initiative and the dynamics are with China. Investment incentives of both the financial and administrative guidance type are set in a pro-China anti-America direction. In many industries like avionics and aerospace, it is clear to market players that if they want to sell in China they will need to produce in China because of both overt and covert Buy China policies and attitudes. By the same token, it is also the case that China provides very aggressive tax, investment grant, and other financial investment incentives that are usually unmatched by the United States. The use by China of Value Added Taxes combined with their non-existence in the United States is a powerful incentive to move production to China.
Until these fundamental factors change, no amount of agreements to consider having state owned enterprises pay more dividends to the Chinese national treasury and to allow foreign financial firms to invest up to 49 percent in Chinese firms is going to change any important trajectories. In particular, they will not change the trajectory of loss of American wealth producing capability and global influence.
Not only have our "top diplomats" led by Clinton given us a feckless performance in Beijing. They are leading to nowhere in particular. They are captives of the status quo, of slogans and shibboleths and the march of events. No one is thinking. They're all too busy doing Dialogues.
So Hillary Clinton and half the U.S. cabinet members have now landed in Beijing for the semi-annual U.S.-China Strategic Dialogue. Had it not been scheduled for the Chinese capital far in advance, it might have been better to have held this meeting in Tokyo. The drama seems to be much more Kabuki than Chinese opera.
I'm trying to imagine Hillary's opening statement. Let's see:
"Excellencies, President Obama has asked me to assure you that he wants a strong and prosperous China so that you can better prevent dissidents from escaping house arrest and taking refuge in locations (the U.S. embassy) that force us to raise embarrassing human rights issues at what are supposed to be strictly strategic discussions. Of course, the president does also believe that you will become stronger as you open up and liberalize your system by blanking out half the Internet and removing references even to fifty year old American movies. I also want to assure you that our recent pivot to Asia and renewed military emphasis in the Pacific is in no way aimed at you in China. On the one hand, you see, our mutual friends in Asia such as the Southeast Asian Countries and Japan and South Korea want to keep doing business like crazy with you, but also want us to be a kind of counterweight so that they don't totally fall under your influence. Because we are no longer economically competitive our only counterweight tool is our military which we are anxious to You know. To a guy with a hammer, all problems look like nails. But we don't really think you are a nail. It's just that we only have a hammer now that you have pretty much taken all the other tools.
On the other hand, our global corporations like Apple and GE need to be sure that their global supply chains here in Asia are safe and secure. As you know, there are a lot of intra-Asian disputes over islands and oil fields and the like and our companies think our military presence tends to dampen those disputes and keep the supply chains running without a hiccup so that we can be sure that, in the words of Steve Jobs, ‘those (supply chain) jobs are never coming back' because we don't want those kinds of jobs for Americans. Of course, executives like GE CEO Jeff Immelt who also heads the president's Commission on Jobs and Competitiveness want to move their high tech jobs to China as well because they know from reading your five year plans that if they want to sell advanced products like GE's avionics in China they'll have to produce them in China so that China can learn the technology. We therefore hope that you will welcome such action by GE and others.
You are no doubt aware that some American analysts think you are manipulating your Yuan to keep it undervalued against the dollar as a way of subsidizing your exports. Although Treasury Secretary Geithner believes a stronger yuan would help China better to contain inflation, you don't have to worry because neither he nor anyone else on the U.S. delegation will accuse you of manipulating the Yuan. On the one hand, we certainly have no intention of embarrassing you by seeming to suggest that you are not playing strictly by the rules, and, on the other, we don't want to deprive the almighty American consumer of being able to buy ever less expensive imports. Beyond all that we are looking forward to hearing more about your strategic economic policies. Of course, as usual, we will have nothing to say in this area because, as you know by now, we believe having no strategy is the best strategy. But listening to yours does alert us as to the industries we will be losing in the future.
Finally, you know, of course, that for domestic political reasons I must always raise the issue of human rights. I thought we had persuaded the blind self-taught lawyer dissident Chen Guangcheng to leave our embassy and entrust himself to your growing appreciation of the need for openness and guaranteed human rights to make your system stronger. Apparently it was actually your threats to beat his wife to death if he didn't leave the embassy that actually did the trick. But never mind about that, the main thing now is to be sure you will have no objections to him and his wife moving to America where we can guarantee their obscurity without the necessity of your beating them to death. Let's now agree on this quickly so that we can get to the main business here which is to assure a continued welcoming environment in China for American investment, and the offshoring of American based production and R&D."
Upon returning to her seat after this statement, Hillary probably should avoid drinking or eating anything that might be served. Indeed, the whole U.S. delegation should probably go on a starvation diet while in Beijing. Or maybe it should arrange a temporary sushi supply chain from Tokyo to avoid any risk of the poisoning that has been the recent fate of foreigners in China who have gotten too involved with China's elite leadership.
If nothing else, the U.S. delegation should at least have a survival strategy.
Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.