Treasury Secretary Timothy Geithner arrived in China this week to continue the ongoing dialogue between the world's two largest economies, and definitely avoid talk about political reform. But democracy of a sort was on his agenda: The Chinese public doesn't trust its government's investments in American dollars, and the popular pressure is forcing Chinese officials to criticize America's economic policies. That gave Geithner a two-fold task this week: placating Chinese officials nervous that the Obama administration's spending plans could undermine the value of the dollar, and, more important, urging China to adopt new policies to dramatically change the focus of its economy.
Geithner was at pains to assure his Chinese counterparts that the Obama administration has the fiscal situation well in hand, even going so far as to promise a budget deficit of 3 percent of gross domestic product after the recession. It's not a new or unwelcome projection, though it is rare to hear such a specific target cited on foreign shores.
But outside of the political sideshow, the much-hyped Chinese ownership of U.S. debt and the controversy over exchange rates (which has led some Americans to accuse the Chinese of currency manipulation) isn't likely to change in the near future.
"The truth is … China really has no choice," Michael Pettis, a professor at the Guanghua School of Management in Beijing, says in an e-mail. "China does not want to hurt its export sector (on the contrary, it is trying to prop it up), and since no one else besides the United States can run such large trade deficits, China has no choice but to keep buying dollars."
If exchange rates and international reserves are something of a settled -- albeit controversial -- issue in both countries, the actual discussions are about changing the relationship of the two economies. For several years now, both China and the U.S. have been contemplating a kind of economic balancing act designed to provide long-term growth for both countries, and, incidentally, remove the incentives that lead to the stalemate over exchange rates and foreign reserves.
Right now, the two countries are linked thusly: China keeps on making it, and the U.S. keeps on taking it. China's export-driven economy has led to massive growth, much of which the government has invested back into U.S. government debt, while America's high rate of consumer consumption has provided an outlet for China's wares.
Now the U.S. is encouraging China to take steps to create more consumption within its own borders by creating a stronger social safety net and health-care system so that the Chinese will save less money and spend more; other steps China could take include liberalizing its consumer lending, which has been limited by the government, and allowing workers to organize and bargain for better wages. Creating more consumption would create more internal demand for Chinese products as well as making openings for U.S. trade.
Meanwhile, for the United States' part, increasing our national savings rate and borrowing less, as well as regulating our financial system more strictly, will make our own growth more sustainable and limit potential bubbles. The countries' twin programs will prevent the global economy from relying directly on the American consumer and lessen the U.S. trade deficit.
Sounds simple, but it's not that easy: The kinds of reforms needed in China to create successful national social services are expensive, especially during a global recession; policies that lead to broader wage growth and shared equality also have the pesky problem of creating a broad middle class that might have other demands from the government.
"[China] wants us to do a combination of things, not all of which can be done together, and we make the same kinds of requests of them," Kenneth Lieberthal, a China expert at Brookings, tells me. "They want us, on one hand, to maximize the rate of the economic recovery, in part because that drives the global economy, and they have bought into the global economy in a major way, and in the other hand they don't want us to take on so much debt that it calls into question … the value of the dollar. Obviously, there are tradeoffs there."
This isn't a new set of policy priorities. In fact, Brad Setser, an economist at the Council on Foreign Relations, argues that little has changed substantively in the Chinese-American economic relationship in the last several years. What has changed is that the global recession has thrown the problems in that relationship into sharp relief.
"[Chinese officials] shouldn't be more concerned now than they should have been a year ago, two years ago, or three years ago," Setser told the Prospect. "Many people, myself included, worried that when those losses [on American investments] became clear, it would become a political issue. I think some of that is bearing out … what's encouraging is that the focus is on the key issue, not secondary issues like capital markets access for U.S. banks."
Other issues of major importance to the American left have also become secondary to the dialogue with China, chief among them human rights. No experts I spoke to thought human rights would be a key issue in the current strategic and economic dialogue with China, which will continue with a July meeting in Washington. This is partially because of the need for cooperation on economic recovery between the two major economic powers and also part of the long-standing American tradition of privileging trade over transformation with China.
Even without the economic distractions, the experts I spoke to caution that publicly chastising China for its human-rights abuses would be counterproductive, urging persistent, quiet pressure. Yasheng Huang of MIT, notes that the most effective framing of political issues is through the economic interests of the Chinese; the focus on improving the lifestyle of the average Chinese citizen (and thus her consumption) could play into the old saw of equating economic and political liberalization. It hasn't been a powerful concept thus far, but a renewed focus on broadly sharing China's growth could lead us to dust off the idea.
On the other hand, even as the Obama administration strives to cooperate more effectively with China and offer the country a respectful engagement as part of its diplomatic reset, Geithner and Secretary of State Hillary Clinton need to remember the hackneyed joke about borrowers and lenders that comes up frequently during this time of credit crunch: If you owe your banker a million dollars, you've got a problem. If you owe your banker $1.5 trillion, your banker has a problem.
Today, China is America's banker. It has a powerful influence over our economic policy. But our government has a window for respectful criticism as well as genuine engagement, since the Chinese government can't afford to upset our relationship too much thanks to our entangled economies. At last, the American taxpayer is too big to fail. Isn't that nice?
