The watchwords for next week’s meeting between President Obama and his Chinese counterpart, Hu Jintao, are “balanced” and “sustainable” when it comes to economic relations between the U.S. and the PRC. Senior administration officials are already laying the groundwork. On November 6, Deputy Secretary of State James Feinberg told a gathering in Washington, D.C., that Asia “needs balanced growth,” noting that the “region depends heavily” on having “a dynamic and open trading system.” That same day, a senior National Security Council official, Jeffrey Bader, told an audience at the Brookings Institution that, before the current economic crisis, “Asian countries — notably China — were exporting large amounts of goods to the United States.That is not a sustainable model and we have been very clear to the . . . Chinese government about that.”
These comments reflect concern with China’s massive trade surplus, driven in part by the artificially undervalued yuan. Administration officials are signaling that they intend for President Obama to pressure China to revalue its cheap currency, which the New York Times’s Paul Krugman calls a “growing threat to the rest of the world economy.”
In fact, in preparing for his meeting with President Hu, Mr. Obama would do well to follow the example of Ronald Reagan in his historic meeting with Mikhail Gorbachev in Reykjavik 23 years ago last month: He should ignore the conventional wisdom and many of his own advisers.
There is pressure on presidents for “deliverables” when they engage in summitry. The Reykjavik deliverable was a significant arms reduction, but Reagan passed when he learned that the price was giving up on missile defense. In time, Reagan was rewarded for his patience by achieving deep cuts in arms while not abandoning missile defense.
For Obama, the deliverable is “balance” in the form of a revalued yuan. President Obama should read the fine print before signing on to this goal.
Rejecting the conventional wisdom about China’s currency starts with rejecting the conventional wisdom about China’s economic growth, which appears to have recovered after dipping to nearly zero at the end of 2008. Beijing has reported a July–September growth rate of 8.9 percent. But this is an artificially inflated number, the result of massive government spending: On a pro-rated basis, Beijing has spent three times as much as the $757-billion U.S. stimulus package. According to Bloomberg News, the World Bank estimates that government support will account for more than four-fifths of China’s growth this year. As Gordon Chang aptly described it in
Forbes, the third-quarter growth figure represents a government-induced “sugar high.” Michael Pettis of Peking University told Bloomberg it is “growth on steroids.” Notes Pettis: “The question now is how to stop pumping so much money into the system without a sharp reduction in growth.”
Into these roiling waters wades the Obama administration to pressure China for a currency revaluation, seeking more favorable terms of trade for U.S. products. But the principal beneficiary of China’s surpluses is the American consumer, who doesn’t find it distasteful to pay lower prices for goods. The administration sees it differently, however. The NSC’s Bader warned that China should not seek to achieve “prosperity based on the profligacy of the American consumer.”
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