- The Washington Times - Thursday, September 24, 2009

The Obama administration is pursuing a grand bargain with China that would address the lopsided economic relationship that contributed to the financial crisis and prevent it from destabilizing the world economy in the future.

The deal with China would be a critical part of a framework agreement the White House is hoping to forge with Group of 20 leaders in Pittsburgh this week, aimed at bringing greater balance to economic growth around the world.

The administration is using a combination of sticks and carrots to win Beijing’s agreement. It recently imposed sanctions on Chinese tires in a public signal that it will resist any flood of imports, but it also is working behind the scenes to champion China’s bid for a greater say in international economic venues by supporting a 5 percent increase in voting shares for China and other major emerging economies within the International Monetary Fund.

The goal of the administration’s strategy is to secure China’s commitment to continuing a trend that emerged during the recession: more reliance on consumer spending and less dependence on exports to the U.S. to drive economic growth.

In return, the administration is pledging to promote lower U.S. trade deficits, more savings and less debt-binging by American consumers, as well as committing to reduce the soaring U.S. budget deficit, which has been worrying China.

The lopsided trade imbalance between the U.S. and China — with the U.S. trade gap burgeoning to more than $250 billion at its peak — is considered a root cause of the financial crisis. Analysts say the credit and housing bubbles that caused the crisis were fed by the constant flow of large sums of money into U.S. securities markets from China as it recycled more than $1 trillion of earnings on exports to the U.S.

The Chinese inflows helped reduce conventional mortgage rates to record lows and helped spawn a subprime mortgage industry whose goal was to quench investors’ desire for higher-yielding mortgage investments.

While China is widely criticized for too much emphasis on exports and building excess reserves that have the potential to spawn financial bubbles, the U.S. is faulted for spending beyond its means, saving too little and going deeply into debt to purchase all manner of goods from China and the rest of the world.

With economic recovery getting under way after a long and painful downturn, the White House views the G-20 summit as an opportunity for new beginnings and for making commitments to ensure mistakes are not repeated.

“This is a time of moving from one way of doing business to another way of doing business,” said Mike Froman, deputy national security adviser. He said the White House is negotiating a framework with other summit leaders for committing to more balanced growth and the structural reforms needed to achieve that.

The agreement also would call on Europe, Japan and other Asian countries to make structural changes needed to balance growth. The commitments would be enforced by IMF reviews and “peer pressure” on G-20 leaders to shoulder responsibility for maintaining sustainable growth in the global economy.

The recession made a dramatic start in paring the U.S. trade deficit with the rest of the world. It prompted China and other countries to focus on domestic growth and encouraged U.S. consumers for the first time in decades to cut back spending and beef up savings to a healthier 4.2 percent of disposable income.

As a result, the U.S. trade deficit in the past year plunged by more than half from annual rates near $700 billion. But analysts fear that old habits could resurface as the economy strengthens.

Fred Bergsten, director of the Peterson Institute for International Economics in Washington, said China, Germany and other countries that have lopsided trade relationships with the United States show no sign of being convinced that their export strategies are problems worth correcting. They also privately doubt whether the United States is prepared to stop consuming more than it produces or reduce soaring budget deficits.

“The key question here is whether the rest of the world believes the United States is really going to stop being the consumer of last resort,” Mr. Bergsten said.

Officials in Beijing have been cool to the U.S. rebalancing proposal. They maintain that the primary cause of the crisis was not trade imbalances but lax regulatory oversight in the U.S. and Europe. China is pushing for progress on the summit’s other major goal: ratcheting up regulation of banks and Wall Street firms.

China nevertheless has made significant progress in the past year nurturing growth at home through generous lending programs for consumers and businesses, and a massive infrastructure building campaign financed by its $586 billion economic stimulus package.

Lending to consumers and businesses soared by 50 percent in China while it was shrinking in the U.S. Observers say China’s malls are filled with people snapping up bargains as Chinese exporters offer to domestic buyers televisions, computers and other items they cannot sell overseas in moribund export markets. And the Chinese have gone on a car-buying binge that this spring lifted the nation’s monthly auto sales above the U.S. total for the first time in history.

“With Chinese domestic demand outpacing that of the U.S., Chinese import growth is outstripping that of the U.S.,” said David Woo, analyst at Barclays Capital. “The rebalancing of demand growth away from the U.S. to China appears to be finally bringing about a resolution of the global imbalances.”

China’s lavish stimulus measures achieved an eye-popping growth rate of 15 percent in the second quarter, in a development that economists widely credited with helping to jump-start the global economic recovery.

China’s timely stimulus just as the world economy was collapsing last fall has won plaudits worldwide, and is another reason the United States is pushing to give the Asian giant a greater say in world economic affairs.

Mr. Bergsten suggested that the U.S. and other developed nations may soon be willing to relinquish the West’s lock on the chairmanship of the IMF and allow China or India to fill the post, to demonstrate their recognition that the economic center of gravity has shifted toward Asia.

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