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Obama's China task: Fix imbalanced trade ties

The old model of Americans consumers buying up Chinese goods isn't working. Where the relationship goes from here could effect the pace of a global recovery.

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President Barack Obama welcomes China's Vice Premier Wang Qishan, left, as he opens the US-China Strategic and Economic Dialogue in Washington, Monday. The meetings are expected to expose sharp differences on trade and soaring U.S. budget deficits.

J. Scott Applewhite/AP

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Remaking the US-China economic relationship could hold the key to getting the world economy on a sounder footing.

For years, these two nations have operated on the premise of imbalanced commerce: China would keep making more goods, and Americans would keep buying them.

Now, a deep recession has exposed problems with that model. A fix won't happen overnight, but it's part of the agenda for both sides as US and Chinese leaders hold a “strategic economic dialogue” in Washington Monday and Tuesday.

Even if an economic recovery gets under way in coming months, American consumers can't afford to keep buying Chinese-made goods the way they did earlier this decade. And Chinese leaders don't want to tether their economic prospects so closely to US consumers – and to the uncertain value of the US dollars flowing to China for each container-load of appliances or clothing.

“The model has definitely changed,” says Tu Packard, who tracks the global economy at the consulting firm Moody's in West Chester, Pa. “We see some gradual life returning to the [US] consumer, but it’s not going to be the way it was before. And the Chinese know this.”

This doesn't mean that America's big trade deficit with China will disappear any time soon. But necessity as well as strategic planning could prod both nations toward greater balance in their economic dealings.

US consumers saving more

Already, the “great recession” since 2007 has taken a big toll on the volume of international trade. Before then, rising house prices and stock-market shares allowed Americans to be the buyers of first resort for products made all over the world. Now US consumers are saving more, buying less.

US exports have also been reducing, but the larger decline in imports has caused the overall US trade deficit to shrink over the past year.

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That's good on its face, but the plunge in global trade has deepened the recession and exposed the risk of “export-led” growth. The global crisis didn't start in Taiwan, Singapore, or South Korea, but they all face economic declines even sharper than the US recession. And China, though still growing in part because of a big stimulus effort from the central government, has also been hit hard.

How can the global economy get back on track? A lot hinges on the US-China relationship, economists say. Both governments are spending big on stimulus programs. But they also need to chart a course toward more stable growth in the longer run.

“Both the US and the Chinese are very much on the same page,” Ms. Packard says. "They recognize that these adjustments have to be made, like it or not."

What China, US must do

China must do more to spur domestic consumption, she says, in part by creating a better social safety net so that workers will feel able to save less and spend more.

The US must get its financial house in order. US consumers are trying to get their debt under control, which could take many years. The US government needs to craft its own plan to avoid unsustainable debt as the costs of baby boomer retirements come due. Financial discipline in America can help China, too, by reducing the risk that China's vast dollar holdings will be devalued by a loss of investor confidence.

President Obama on Monday called for the two nations to not only work at resolving friction points, but also to cooperate in areas of mutual interest. “Neither of us profits from a growing dependence on foreign oil, nor can we spare our people from the ravages of climate change unless we cooperate” on clean energy alternatives, Mr. Obama said.

But even this is a potential source of conflict, given the scramble to dominate emerging industries such as electric cars, and the global debate over how much rich nations should subsidize developing countries to control carbon emissions.

Achieving a new economic balance won't be easy for either nation. Both face tough choices on how to pay for healthcare. Within China, there's strong political pressure to try to maintain the export-oriented model of growth. In the US, many critics of China want to see the Obama administration take a tougher line on alleged trade-law violations. Only then, these critics say, will American manufacturing rebound and the imbalances with China be resolved.

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