US and China: to cooperate - or collide?
By ROBERT SAMUELSON
CHINA is the question, but what's the answer? Everyone recognises that China's emergence as an economic superpower is a surpassing development, even if we don't know its full significance.
A China of 1.3 billion mostly impoverished people will influence only its immediate neighbours. A China that is now the world's sixth-largest economy and fourth-largest exporter, with stunning economic growth rates (9.1 per cent in 2003) and ambitions to excel in almost every technology, is something else entirely.
No one much talks about this, because it's hard to know what to say. The situation is novel. Since World War II, the United States' biggest economic and trading partners have also been our closest political and military allies. China breaks the pattern. It is now, after Canada and Mexico, our largest trading partner and the source of our largest trade deficit: about US$120 billion in 2003. But China is neither ally nor adversary. People fumble for the right words.
Is China a 'threat' or an 'opportunity'? Beyond that, we don't know China's effect on the world economy. Is it a low-wage magnet drawing jobs and investment from elsewhere? Or is it a powerful locomotive whose development needs will pull everyone else along? Until recently, it seemed a magnet. China has attracted about US$500 billion of foreign investment - mainly for new factories and mostly at the expense of other Asian nations.
'Two years ago, (Asian countries) were trembling,' says Nicholas Lardy of the Institute for International Economics. But recently, China has turned locomotive. Its imports in 2003 rose 40 per cent or about US$118 billion, says Lardy. Steel imports totalled 36 million metric tonnes, a record for any country and double the level of the late 1990s. 'Most of that steel is coming from Korea and Japan - even India is selling . . . They're elated,' says Lardy.
Some things are clear: for example, China's gigantic need to create jobs, which - if unmet - might stir unrest. Every year, the labour force grows about 10 million, estimates a study from the International Monetary Fund (IMF). In addition, China's modernisation of inefficient state-run companies means factory closings and layoffs. Meanwhile, rural workers move to cities for better-paying jobs. There are another 9 million jobs needed, says the IMF study. By contrast, the US economy creates 3 million jobs in a good year.
China also wants to be more than the world's sweatshop. It didn't send a man into space for only prestige. 'There's a growing problem of industrial policy,' says Alan Wolff, a trade attorney who represents US industries. 'The Chinese have said: 'You can invest - but we want your technology.' '
Every foreign company must worry that it's arming future competitors. Consider computer chips. China imposes a 17 per cent value added tax on chips. But chips produced in China, as opposed to imports, can get most of the tax (up to 14 percentage points) back as a rebate. The idea, says Wolff, is to force companies to locate chip factories in China. (The US says the measure violates the rules of the World Trade Organization.)
We have other interests with China - North Korea's nuclear programme, terrorism, Taiwan's status - but our political relationship depends partly on our economic relationship. If the economic costs seem too great, they will poison the politics. The flash point is that huge bilateral trade deficit. In theory, it might not matter. Countries need not have evenly balanced trade with each other to benefit from trade. Suppose China sells to us and buys from Thailand; then Thailand buys from Brazil, which buys from us. Everyone can gain. But weak US job growth and a big trade deficit with China - suggesting unlimited 'outsourcing' - is a lethal political combination. If it continues, it could raise questions about standard economic theory.
One fear is that China's recent growth spurt reflects an easy-credit 'bubble' that, once popped, will curb imports and cause China to emphasise export-led job growth even more. Another danger is that China merely represents the last stage of Asia's supply chain and that Asia - as a whole - sells much more abroad than it buys, parking surplus earnings in US Treasury securities. This lopsided trade shifts jobs to Asia.
It's one reason the Bush administration has pressed China and other Asian countries to revalue their currencies and make their exports less inexpensive. In 1980, China traded little, and most of its people lived on the edge of subsistence. Now, everyone wants a piece of the China market, but there are underlying fears that we may be abetting an uncontrollable colossus.
Questions remain as to how China affects the global economy and whether China and the US will cooperate or collide. We don't know the answers, and - almost certainly - neither do the Chinese. - The Washington Post Writers Group
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