U.S. and China on a collision course
By Philip Bowring, International Herald Tribune
For far too long I believe the US Congress and our trade policies have been ignoring warnings of the future... that our economy of consumption can no longer be sustained at the rate is has in the past with the current world trade policies, and economic realities here at home.
For me, admittedly not an economist, I can only deduce from history that the superpower status we have enjoyed for so long was a direct result of a strong, industrial and manufacturing base with good paying jobs and our most base needs being manufactured internally. Steel, copper, textiles, and to some degree, energy. (our high rate of dependence on foreign oil has happened over the last few decades)
As our industrial strength ebbs, China's and India's grows. And as our US high paying industrial and manufacturing wages are replaced by service jobs, our consumption ability also wanes. But unfortunately our spending habits - used to a certain affluence - does not.
It doesn't require a crystal ball to see that the US is most likely to be forced into turning the reins over to the new superpowers of China and possibly India, just as England and Germany surrended theirs as their industrial base diminished. Today Germany lives with double digit unemployment. Is this the harbinger of our future?
The US's rise to economic superpower status is also attributable to the coinciding trade structure of the era - the likes of which doesn't currently exist in China's economic growth. Instead they plod forward, content in wearing blinders.
China has consistently failed to grasp the currency nettle despite years of promising a more flexible policy and after more than two years of growing international disquiet about global imbalances arising in part from currency misalignments of which the yuan is the most significant. China's success has blinded it to the dangers of international reaction against its trade and currency policies.
There has been a mix of reasons for China's failure to change: bureaucratic inertia, an indecisive new leadership, fear of the impact on employment and the financial system. But the most important factor now seems to be reaction against U.S. pressure. Nationalism has been on the rise as China's pride has been swelled by foreign adulation.
Unfortunately for China there is now no way that it can continue on a course of reliance on a U.S. export market which, one way or another, is likely to be cut back to bring the trade gap down to sustainable levels.
China too must recognize that while its exports have helped power remarkable economic growth, they have built up domestic as well as international problems. The fixed exchange rate and gargantuan surplus have propelled excessive monetary growth and a level of fixed asset investment that exceeds that in southeast Asia before the 1997 crisis.
The massive industrial and infrastructure overcapacity now being built seems sure to produce a collapse in profits, another surge in nonperforming loans and a sharp decline in investment and growth. These could hit just at the time when China is finding severe headwinds, if not outright barriers, in the United States.
As for the United States, its assumption that it can have continuous 3 percent GDP growth based almost entirely on other nations' savings is even more remarkable. The buyers of U.S. debt - mostly Asian central banks - have helped sustain U.S. illusions about its economic prowess. More the fool they. But the United States itself is mainly to blame for abusing the role of the dollar to buy growth. China is right that the trade deficit is a U.S. problem that will not be solved by a yuan revaluation. Indeed it could make it worse and create inflation, not jobs, in the United States.
Nothing but a rise in savings - which means a sharp fall in consumption - can solve the deficit problem. In other words, the United States must face up to the necessity of a recession or prolonged minimal growth if balance is to be restored. Policies under Bush/Greenspan have delayed the day of reckoning. But it is coming.
To this novice viewer of economic history, this sentient article by Mr. Bowring doesn't seem far of the mark . We're on track to a completely different future for our grandchildren and great grandchildren. And this makes me quite sad.
For if I could leave only legacy to our future children, it is to pass on the freedom and strengths this country possessed - all possible because of our economic power. The reality is a free but impoverished nation, with no money for defence and research, will not be free for long.
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