Summary of the breakout conversation “How is China Changing the World Economy?” at the 2010 Annual Members’ Conference.
Panelists:
Tim Adams, Managing Director, The Lindsey Group
Philip Lader, Chairman, WPP plc; Senior Advisor, Morgan Stanley; Former U.S. Ambassador to the United Kingdom
Stuart Eizenstat, Head of International Trade & Finance, Covington & Burling; Former Deputy Secretary of the Treasury
Moderated by Albert Keidel, Nonresident Senior Fellow, Atlantic Council
Summary:
Panelists in this session focused the majority of their comments on one central question: As the countries of the world recover from the global financial crisis, is China attempting to develop their own set of rules and norms for the international system in contrast to existing rules and norms?
The current state of the global economy exhibits bifurcation in the growth trajectories of many countries. There are enormous demographic, social welfare reform, financial market and trade policy reform, and debt crisis issues with which developed countries are currently grappling. The other half of the global economy, the developing countries, is growing very robustly.
In this environment is China trying to change the rules and norms of the international economic system for its advantage? The panelists in this session believed for varying reasons China is indeed touting its development model, and it is imperative that the Transatlantic Community work together to uphold the values, rules, and norms of the system it created.
Most panelists – and many American entrepreneurs – believe at least four Chinese policies in practice exhibit its clear intent to create, promote, and establish its own international rules and norms to compete with the current international system.
First, China’s policies of inward investment and trade are unfair. Very few investments from China are turned away by other countries, yet China by comparison has many barriers to foreign investment in its economy. Chinese enterprises, often state-owned, are favored regularly over foreign enterprises in the Chinese domestic market. China’s policies of indigenous innovation and technology transfer dictate limits on products developed and used in China and exclude some of the most innovative foreign suppliers, the associated R&D, and resulting innovation benefits to the Chinese market. China has not signed up to the World Trade Organization’s Government Procurement Agreement that regulates trade concerning purchase of goods and services by WTO member states’ government. Foreign firms are required to enter into joint ventures with Chinese enterprises in order to invest in China. These comprise significant barriers to entry that hobble foreign companies’ competitive advantages and unfairly limit market-based competition for foreigners attempting to operate in China.
Second, China’s linked aid and foreign natural resource procurement strategies are alarming. Everywhere one looks, China is locking up resources around the world and doing so with suspect regimes and with quid pro quo aid programs that violate OECD investment principles.
Third, the panelists each consider China a currency manipulator. China’s RMB is undervalued by at least 20-25% by popular estimates and possibly more as a result of direct government policies. According to Fred Bergsten’s study on this matter, China did appreciate its currency during 2005-8 by 25 percent, and if China revalued its currency another 25% percent over the next 2-3 years it would create an estimated 500 thousand jobs in the U.S., reduce U.S. trade deficits by $500 million, and reduce China’s surplus by $500 million.
Fourth, China is attempting to limit access to global commons, particularly the internet. It poses an alarming threat not only to cybersecurity, intellectual property, and proprietary rights, but also to universal values of free access to information, ideas, and speech.
From the American and European business perspective, all of these matters – inward investment strategies, foreign aid and resource procurement strategies, currency manipulation, and limiting access to cyberspace – appear to indicate China is in active competition with Western values and norms.
Not all panelists agreed with this view of China’s competing rules and norms. What is really at issue when we talk about these matters is the appropriate role of the state in an economy. Governments take on different roles in the management and regulation of the economy at different stages of economic development and state-building. Sometimes free markets require stronger governance, because efficiency can often imply less liberalization and more oversight.
From this perspective, China is not challenging the global international system. The global financial crisis humbled old economic models, and those models have not always worked for every nation. In fact, many nations still remain poor today because they simply cannot afford expenditures on infrastructure. China is not the only nation in East Asia to invest heavily in its own infrastructure and in building better institutions of economic regulation. Countries always have used industrial policy at early stages of development, and by many metrics China sill is a poor country.
What’s really at stake is the changing role of governments in the international economy, especially with concern to global liquidity. Should rich countries only have trade surpluses and poor countries only run trade deficits. This is the traditional microeconomic prescription for economic development. Do governments still have the right to create money supplies and then reap the benefits while poor countries sink further into debt? The worldwide purchase of U.S. treasuries created a glut of credit in America, but in return it focused global liquidity in the hands of one nation, and limited liquidity and thus also credit for many developing nations. The global financial system prior to the crisis was in a phase of deregulation and/or non-regulation, which expanded liquidity for some but not all. China had no trade surplus until a few years before the crisis, when the U.S. financial bubble was ready to burst.
China’s growth has not been based on export-led development, but rather on infrastructure and other domestic investment. They output and export light manufacturing, low-skilled goods and import large technological and other capital inputs. Expansion of liquidity emanating from the U.S. in the 1990s outstripped China’s ability to invest overseas and left to China no choice but to invest in dollar-denominated assets. Thus it is not mercantilist.
China’s financial system is fairly efficient. Financial systems that do not have a public regulatory component will not have sufficient capital to build infrastructure. Transportation, social welfare, communications and other public goods are all created by large public investments, and after those investments are made, only then can you get to the Adam Smithean system.
China’s currency is out of line and not fully flexible because it’s short term capital accounts have limited, carefully managed ingresses and egresses. This secures the economy against the potential swift flight of capital that threatened by South Korea and Thailand during the 1997 Asian Financial Crisis, and allows China monetary policy independence, despite the RMB exchange rate being fixed to a basket of currencies. Bergsten’s study is based on a mathematic modeling system with a single variable, an exchange rate, so the study is not an accurate portrayal of what is really going on. Appreciation of the Yuan will happen in the long run, but it simply isn’t possible with limited short term capital flows to have a market-oriented exchange rate.
Despite limits on the internet and other civil and human rights concerns in China, the government widely enjoys popular legitimacy. The government mandate is based on improving governance, delivering social welfare and other public goods, and creating economic growth and opportunity for the people.
Whether China seeks to challenge Western values and the established system of the international rules and norms remains very much unclear. Many see China promoting a competitive model. Others see China as simply pursuing different goals which are appropriate to its current stage of economic development, not challenging the existing order. Regardless, it behooves western nations to improve transatlantic cooperation on financial and regulatory reforms; to improve stability of the international financial system in the wake of the Global Financial Crisis; to help each other in appropriate ways to recover from the economic imbalances that either caused or were caused by the crisis; and do everything possible to assist China in becoming an increasingly responsible stakeholder in the existing world system.
-Summary by Patrick deGategno, Associate Director, Asia Program
This session was held under Atlantic Council Rules, defined by President and CEO Frederick Kempe as “Chatham House Rules with military enforcement.”