- The Washington Times - Thursday, November 2, 2006

Instead of worrying about the growing economic power of China and India, Americans and Japanese should understand that the real challenge would be sustained economic slowdown in these two countries, U.S. and Japanese economic officials said.

“It is important for Americans and Japanese to understand that we have nothing to fear from the growing economies of China and India if the way forward is one of engagement and integration,” said Noboru Hatakeyama, who led a binational study group that met last month in Washington.

“Indeed, the average person has more to fear from the impact of a destabilized Asia, should China and India falter in their roles as engines of growth,” he said.

According to gross domestic product (GDP) data from the International Monetary Fund, the Chinese economy has grown at an average annual rate of nearly 10 percent since Deng Xiaoping’s reforms in the late 1970s. Since India began implementing economic reforms in the early 1990s, it has averaged annual growth of almost 6 percent.

Some projections show the Chinese economy surpassing Japan’s in size by 2020 to become the world’s No. 2 economy. Others forecast that within 50 years, both the Chinese and the Indian economies will be larger than that of the United States.

“We believe that the concerns about the economic rise of China and India are overstated,” said Kenneth Dam, another study group leader and a former deputy secretary of state and of the Treasury. “China’s most important goal is to increase its 2000 GDP fourfold by 2020. This will require China to continue focusing on its economy, limiting the potential for using the country’s economic power for other purposes.”

According to the report released by the binational study group — sponsored by sponsored by the Chicago Council on Global Affairs, the Pacific Council on International Policy and the Japan Economic Foundation — China and India “face very real challenges to robust and sustainable development.”

The report points out that the Chinese growth is currently driven by heavy government investment in infrastructure and that its growth in demand comes more from exports than domestic consumption.

And although India’s economy is less export-dependent and has better debt and equity markets, the report calls attention to the nation’s bureaucratic inefficiencies that repress entrepreneurship.

In response, the study group suggested that the United States and Japan “provide technical assistance to help China strengthen domestic financial markets, the rule of law and social security systems” and “increase loans and aid to India for physical infrastructure, schools and health care.”

The study also advised the United States to increase national savings — “first by reducing the size of the federal budget deficit” — in order to reduce the economic imbalances between China and the United States. Last year, the U.S. bilateral trade deficit with China ballooned to $194 billion, by far the largest bilateral deficit in history.

“The United States cannot continue indefinitely to import more than it exports and borrow internationally to make up the difference,” Mr. Dam said. “China cannot indefinitely rely on ever-greater trade surpluses to absorb the output of its rapidly expanding factories.”

The study suggested that only by promoting free trade throughout the Asia-Pacific region can the United States, Japan, China and India enjoy the full benefits of the economic rise of the world’s two most populous countries. In response, the United States should try to gain a seat in pan-Asian trade negotiations — the Association of South East Asian Nations-plus groups — and work with Japan to create a free-trade agreement involving all members of the Asia-Pacific Economic Cooperation.

Acknowledging that China and India together currently graduate twice as many engineers each year as Japan and the United States, the group said that exports from China and India are “moving up the value chain” — moving from low-cost production of standardized goods and services to the development, design, marketing and distribution of high-tech products.

“The United States and Japan should promote cross-border movement of highly skilled people in science and technology among their two countries and China and India,” Mr. Dam said. “Also, the two countries should improve the quality and efficiency of primary and secondary science education.”

In closing, the study called attention to China and India “locking up” long-term energy deals. To feed their enormous need for electricity over the next 20 years, the two nations are projected to account for 75 percent of the increase in world coal demand and 30 percent of the growth in global demand for oil. Both countries are paying top prices and are willing to sign agreements with countries such as Iran, Kazakhstan, Russia, Syria and Venezuela.

Mr. Dam said that as world leaders in energy conservation and renewable technologies, the United States and Japan should work with China and India to address environmental degradation issues.

“The opportunities for American and Japanese firms to benefit from improved energy and environmental quality are immense, but it will require governmental leadership to make this possible,” the report concludes.

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