My Wednesday column this week concerned the American-Chinese economic relationship and Treasury Secretary Tim Geithner's visit there. Geithner went to offer a strategy for both countries to balance their economies, with China providing more domestic demand and the United States easing off its borrowing. One of the experts I contacted for the story was Council on Foreign Relations economist Brad Setser, who maintains a bangin', if wonky, economics blog and posted about the same subject yesterday in much more specific terms. He argues that rebalancing the U.S.-China economic relationship might be easier than some fear:... First, the trade deficit is down, so the US actually needs less financing from the rest of the world right now than it did in the past. It isn’t clear to me that the US relies more on China now than it did back in 2007 and early 2008, when China’s reserves were growing faster and the US external deficit was larger. Second, China’s own concerns about its dollar risk could generate a larger constituency for change inside China.Until now, China’s policy has been dominated by concerns about the impact of any change in China’s exchange rate on China’s exports. Yet it is hard to see how China can realistically scale back even the pace of increase in its dollar exposure so long as it is running a large trade surplus and pegging to the dollar.Chinese policy makers have been searching for a way to avoid adding to their dollar exposure without changing their dollar peg. Here though, I suspect that my colleague (boss, actually) Sebastian Mallaby is right: China’s efforts won’t get China very far so long as China’s capital account is closed and China pegs to the dollar. As China comes to the same realization, the pressure on it to adjust its policies will grow.It's something to hope for; part of recovering from this crisis is figuring out a new engine for global economic growth that isn't completely based on U.S. consumer consumption and debt, and these policy shifts could contribute to progress in that direction.
-- Tim Fernholz
Picture of the Beijing skyline courtesy Flickr user lensfodder.
