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For the first time in centuries, China now affects the global economy as much as it is affected by the global economy. In the years ahead, China is likely to account for between a third and half of growth in global incomes, trade and commodity demand, and its significance will only increase as its share of the world economy rises.
I returned last week from a trip to China with the dispiriting conclusion that the world lacks shared understandings regarding goals for the evolution of the Chinese economy, the objectives of China policy in the short and medium term, and the institutional structures needed to manage both co-operation and inevitable tensions. President Xi Jinping has rightly called for a “new form of great-power relationship”. But it must be embedded in, if not a new international economic architecture, then a substantially revised and updated one.
The first issue on which clarity is required is whether it is the objective of the US and the global community to see China succeed economically as a support for global prosperity and a driver of positive social and political change, or whether it is to contain and weaken the country economically, so it has less capacity to mount global threats. This is seen in Beijing as a live question, and is a matter of debate beyond the shrill rhetoric of protectionists and politicians.
The Council on Foreign Relations, hardly a source of xenophobic or radical ideas, recently issued a report drafted by leading US diplomats condemning American efforts to build up China within the international economic order and calling for a “balancing strategy” that includes “new preferential trading arrangements . . . that consciously exclude China”. No small part of the case being made by the Obama administration for the Trans-Pacific Partnership trade deal involves the idea that it will promote competitiveness vis-à-vis China and reduce China’s influence in determining global trade rules.
The world cannot expect economic co-operation from Beijing if its objective is to inhibit Chinese economic performance. As Mr Xi’s rapturous recent reception in London illustrates, the US may isolate itself from traditional allies if it does not co-operate economically with Beijing. If Chinese economic performance deteriorates substantially, there is a risk that a balancing strategy invites a hostile nationalist reaction. None of this is to say Washington does not have valid concerns about China’s behaviour in the economic arena or to deny that these should be pursued vigorously. It is to say that our objective must continue to be mutual growth and prosperity.
Second, China faces fundamental economic policy choices in which the whole world has a great stake. At a time when its economy is slowing and its wealth-holders desire to diversify their assets abroad, it is incoherent to favour both financial market liberalisation and exchange rate appreciation, as some in the US do. The necessary reforms if China is to grow sustainably and strongly over the next decade — such as closing unprofitable state enterprises and limiting the ability of local governments to borrow and build on a vast scale — will surely take a toll on growth in the short run. This will reduce demand for imports from the rest of the world and raise China’s trade surplus.
Reasonable policy dialogue requires a recognition of the tensions between short and long term, and national and global interests. The world is likely to benefit from recognising that its deepest interests lie in China pursuing more not less reform, even at the expense of modest reductions in its contribution to global demand over the next couple of years, and possibly more exchange-rate depreciation than we would prefer.
Finally, there is the question of institutional architecture. The emergence over the past year of a major Asian trade integration effort (the TPP) in which China does not participate, and a major financial institution (the Asian Infrastructure Investment Bank) in which the US does not participate, is hardly auspicious. Worse, the US failure to provide congressional approval for China’s voting power in the IMF to rise above that of Belgium’s suggests a troubling indifference to global reality. Institutions in which both powers have appropriate roles are urgently necessary if the global economy is to get back on track.
In The Economic Consequences of the Peace, John Maynard Keynes asserted the primacy of economics, observing: “the perils of the future lie not in frontiers and sovereignties but in food, coal and transport”. His call for strong polices directed at promoting mutual prosperity and co-operation went unheeded, with catastrophic consequences. Today, the perils of the future have much to do with China’s rise and with the worlds of commerce and economics. Let us hope that we find the wisdom to manage them well.
The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary