QUERETARO, Mexico, Dec. 11 (UPI) -- At any one time in the world economy multiple trends coincide. At present China is part of several important trends. It might help to understand them if we first look back at another trend: Japan's rise.
In the 1970s, when your correspondent was a boy, it was common in Britain to deride the Japanese cars that were then beginning to flood into the British market. "They're cheap but not much good," was the refrain. "Rust buckets."
British manufacturers also complained of something else: the undervalued Japanese yen which helped to make Japanese cars competitive in the international market. And the yen was weak at that time, undoubtedly. British manufacturers (and no doubt others in other countries) complained loudly -- just as now American manufacturers are complaining loudly about China.
But there was another side to the Japanese car story. Japanese cars were not worse than British ones. On the contrary, they were in many respects better. They tended to be not only cheaper but more reliable than British ones and they offered more (electric this, electric that) for the price. The British consumer liked having a radio cassette player in his car.
And there was yet another side to this, which was that British management of car firms was not of the best. As the Japanese threat grew, what met it was a mixture of complacency ("Japanese rubbish") and incompetence. Britain's socio-political picture did not help. Even if management realised the need to become more efficient, cut costs, offer consumers what they want, belligerent unions stood in the way. Workers were not going to change production practices without a fight.
We know the end of the story. Thirty years on there are no purely British car firms of any size -- which is sad indeed given the quality and innovation of many British engineers -- while Honda and Toyota, especially, and also Nissan and Mazda and Mitsubishi sell cars of quality at good prices around the world.
Nowadays it is China, not Japan, that is provoking alarm among manufacturers, mainly in the United States. The constant claim is that China deliberately keeps its currency, the renminbi, undervalued. Manufacturers have called for U.S. Treasury Secretary John Snow to speak to the Chinese government and demand that the renminbi, currently pegged at a fixed rate to the U.S. dollar, be allowed to strengthen (which would make Chinese goods more expensive in dollar terms -- all other things being equal; and, as we discuss below, they would not be.)
Today, Thursday, Federal Reserve Chairman Alan Greenspan weighed in on the topic, saying in Dallas, Texas that a "rise in the value of the renminbi would be unlikely to have much, if any, effect on aggregate employment in the United States, but a misaligned Chinese currency, if that is indeed the case, could have adverse effects on the global financial market and, hence, indirectly on U.S. output and jobs."
Greenspan is right to point to the global dangers. China is accumulating dollar reserves; its money supply is growing fast; it has a credit bubble and unwise investment; its banking system is vulnerable. China should be concerned about all these things.
But the picture is still more complicated. The relationship between China (and Japan and Taiwan) on the one hand and the United States on the other is a symbiotic one, to a degree like that between bees and flowers. But this symbiosis, rather than permitting a healthy balance, is allowing unhealthy and dangerous imbalances to persist.
China has a large trade surplus with the United States and is also winning the competitiveness race against other countries, such as Mexico. Meanwhile the Chinese government (and the Japanese and Taiwanese ones) are recycling the surplus dollars earned from trade, which might, with a floating currency, push the renminbi up, by buying U.S. government securities.
Who is funding U.S. President George W. Bush's spending spree?
European investors, who have seen the euro rise by more than a third against the dollar in the past two years (and therefore their dollar assets lose value by a third), are steering clear of U.S. assets. That is why the euro is appreciating against the dollar. Bush's creditors are the Chinese and other Asians, and governments not private institutions. The Chinese government is buying U.S. debt in order to help sustain its export model -- and the present equilibrium in the world economy.
U.S. manufacturers don't like what is going on because they believe China is giving itself an unfair advantage by deliberately keeping its currency, which is fixed to the dollar, cheap. But were China to allow the renminbi to appreciate, China's export competitiveness might not be harmed. If the Chinese currency were stronger it is likely that Chinese firms (including U.S.-owned ones based there) would cut other costs in order to preserve the export-based development model.
The U.S. government meanwhile cannot really be unhappy with the current state of affairs. Were China to cease buying U.S. government securities -- which offer, let us remember, absurdly low returns at present -- then the yields on U.S. Treasuries would rise. The U.S. housing market would be hammered. The U.S. economy would be likely to head for recession.
China depends on the U.S. market, manufacturers think, and they are right. They depend on the free-spending U.S. consumer -- whom Bush wants to keep free-spending. But the U.S. government and U.S. economy also relies on China and on China's savings. Deficit here depends on surplus there.
There is another trend we must return to: the rise of China as an exporter. Just as Japan did thirty years ago, China is becoming an increasingly important part of the world economy. And unlike Japan or Europe (and like the United States), and despite its reliance on exports as a driver of its development, it has a dynamism of its own, provided by its conversion from communism to capitalism.
For the United States the emergence of China as an economic force is good news, because one of the reasons why the U.S. economy has struggled in the past three years is that, with the U.S. engine stalling, there has been no other motor for the world economy. (Unwisely, in our view, Bush and Greenspan have responded to the U.S. engine's sputtering by pouring more and more fuel into it.) But in ten or twenty years the growing Chinese economy will become more and more of an engine for the United States and a big consumer of U.S. exports as well as an exporter to the United States.
Within the world economy (or indeed any economy) players always rely on one another. That is how economics works. But there are healthy equilibria and unhealthy ones, and for now the equilibrium is unhealthy and dangerous. The U.S. economy has huge imbalances in the fiscal and trade accounts. It needs capital from the rest of the world. The willing provider is the country that is selling a big surplus of goods to it: a fast-developing giant of a country with an unpleasant, authoritarian government, a vast, poor population, ready to work for very low wages, and a banking system that is creaking dangerously.
In the longer term one can be optimistic that China is heading for greater prosperity and that the world will be buying more and more Chinese computers and perhaps Chinese cars -- and perhaps less U.S. made ones. (And, to return to the ideas at the beginning of this piece, that has to do, too, with the way American car firms have been run, producing cars whose engineering, fuel consumption and comfort generally fall behind the best European and Japanese competitors.)
But the United States will get richer, nor poorer, because of Chinese growth, just as Britain has got richer, even if its car firms went to the wall.
In the near term -- the next few years -- how the United States will overcome its huge dependence on debt (and its reliance on Asia as creditor of last resort) is less easy to see.
Interesting times, as the Chinese proverb says.
Global View is a weekly freelance column giving a personal view on issues of importance for the world economy. Comments to [email protected].
