Treasury Secretary Paulson has just completed a successful visit to Beijing. For the USA, there is indeed a great deal to discuss with the PRC and the agreement to institute a process of discussion is a success story. An economic hotline between Beijing and Washington is very much in order. We have learned the hard way that we cannot force democracy by invasion and occupation. Nor can we ensure free trade by taking punitive actions via legislative procedures. China's Industrial Revolution has been an accomplishment of the first rank and the rest of the world continues to marvel at the Chinese achievement. For the past quarter of a century China's GDP has grown annually at an accelerated rate of over 9 percent. Given China's huge geographic area and 1.3 billion population base, I have argued that China will be able to continue to maintain an approximate annual rate of growth over 9 percent for some years to come.
China's economic presence, for export promotion and for importation of critical materials, inclusive of nickel, zinc, and copper, has spanned all continents. In Asia, the PRC has enriched its economic ties with her trans-Himalayan neighbor, India, in the south. Jointly with Japan and Korea, China has taken a leadership role in the 4 (Japan, China, Korea, and India) plus 10 (Singapore, Malaysia, Thailand, Indonesia, the Philippines, Myanmar, Cambodia, Laos, Viet Nam, and Brunei Darussalam) model for championing the case for an Asian continental economic community. China has made deals with the resource-rich economies of Kazakhstan and Kyrgyzstan, and her economic engagements with Russia , the European Union, the African Continent, North America, and South America, including Cuba, have been extensively reported.
China’s ever increasing trade surplus is certainly an issue of concern. Of course, China’s purchase of US government bonds worth about US$ 2 trillion is the first positive step. With an hefty appreciation of the Yuan, a pro rata revaluation of US debt may warrant negotiation. Other things being equal, a revaulation of the RMB vis-à-vis the US dollar will make Chinese exports to the USA more expensive and exports from the USA to China competitively cheaper. However, other things are seldom equal. The recent euro-dollar exchange rate fluctuations lend little support to the classical hypothesis that the appreciation of the Chinese currency beginning in July 2005 through September 2006 would have any significant impact on reducing American demand for Chinese exports. The fact is that in the post-WWII decades, American households have become imperial consumers and have been engaged in an insatiable demand for goods and services produced in all parts of the world. Americans will not cease their consumption of Chinese exports, even at the higher prices that will follow the appreciation of the RMB. OR Americans are likely to consume exports from China even at a higher price following appreciation of the Chinese currency. The trade deficit will persist, adding inflationary pressure to our CPI.
Let us also note the fact that much of China’s exports to the USA are exports of goods manufactured in China by American investors. These export revenues contribute to the pool for profits repatriated home of the concerned corporations. Additional fiscal inducements recently offered prompted them to pay taxes on that repatriated profit income, facilitating a possible reduction in America’s budget deficit. Our national debt has approached a record of US$ 9 trillion, making our debt/GDP ratio critically suboptimal.
China’s industrialization was funded largely by Foreign Direct Investments (FDI) with one hundred percent foreign ownership. China’s next phase of growth, based on a westward movement of industrial explorations in the untapped western frontier, will be funded by foreign financial institutions, banks, investment bankers, and hedge fund operators from all over the world, who have been in China to earn lucrative service charges on their investments.
Other than trade, issues of concern include environment, corruption, intellectual property rights, and human rights. In regards to environment, both the USA and the PRC have declined to sign the Kyoto Protocol. Obviously, they have a great deal to discuss. As for corruption, the men of wisdom have taught us that it is not a monopoly of an individual nation state economy. For intellectual property rights, any bi-national agreement between the USA and the PRC will have limited effect. The presence of multinational corporations calls for the institution of an international body to formulate a protocol with the power of enforcement. The World Trade Organization may consider adding the job to its charter. The issue of human rights has recently been open to much discussion in both the PRC and the USA., but again the core issue is the sovereign authority of a nation state. Will both the PRC and the USA agree to binding international supervision? There is nothing to suggest that they will voluntarily compromise their traditional sovereign authority. There is no quick fix. Secretary Paulson has earned our thanks by way of initiating an economic hotline between the two countries.
