- The Washington Times - Monday, May 31, 2010

The latest installment of the U.S.-China Strategic and Economic Dialogue concluded last week, and nothing comes to mind so readily as that classic joke about communism: “They pretend to pay us, and we pretend to work.” Only the talks are much worse than a joke. They keep pushing the U.S. and world economies further away from genuine recovery and closer to renewed bubblization.

Like its outsourcing-controlled predecessors, Team Obama pretends to negotiate on behalf of U.S. economic interests, but the Chinese don’t even pretend to play along. All of China’s ongoing trade predation remains firmly in place, and all the resulting global imbalances underlying the economic and financial crisis remain in place. Only multinational manufacturing and importing interests, which benefit at least in the short run from China’s myriad export and production subsidies, could like these results.

More intriguingly, the greatest mysteries surrounding the Chinese economy continue to befuddle U.S. policy and China watchers: Why, after such stunning progress, does China still depend so heavily for growth on exports rather than on supplying its own market? And why does China spend so much of its new wealth subsidizing the consumption of already-rich Americans rather than meeting its own people’s still-staggering needs?

These questions matter because, thanks to its exportmania and surpluses, China has been subtracting from global demand on net, not fueling it, as many enthusiasts claim. These contractionary effects, of course, became especially painful for its trade partners and the entire global economy once the crisis hit.

Forget about the latest round of excuses, served up by the Chinese and their apologists. China’s rebalancing has been overdue for years — and certainly well before anyone knew about Greece’s woes.

The resources don’t seem to be lacking — thanks to long-running double-digit growth and the huge trade and broader financial surpluses produced by the export drive. As Goldman Sachs economist Jim O’Neill wrote in the latest issue of the International Economy magazine, “Since 2001, China’s overall GDP has increased by $3 trillion, the equivalent of creating two new United Kingdoms or two new Frances. In the next eight years, the Chinese will create another Japan.”

Meanwhile, the McKinsey Global Institute projects that the right policies could boost the private consumption share of China’s economy to more than 50 percent from the current 34 percent. (Personal consumption, by contrast, still represents nearly 71 percent of the U.S. economy — higher than during the last bubble.)

Yet, although China’s personal consumption keeps rising in absolute terms, in relative terms it keeps shrinking. During the late 1990s, private consumption comprised just under 50 percent of China’s GDP, according to Stephen S. Roach of Morgan Stanley Asia. In other words, however fast the Chinese consumer market has been growing, its exports and its investment (much of which builds up its export complex) has been growing faster.

Numerous explanations more credible than “Blame the Greeks” have been advanced, but few seem truly convincing. The Chinese claim that they’re culturally biased against consuming. But tell that to the world’s luxury goods companies, who can’t restock the proliferating boutiques catering to China’s already wealthy urban elites fast enough.

Others point to the almost nonexistent social safety net, which forces typical Chinese families to save more to fund their own retirements and medical bills, and care for aging parents. Yet this theory simply begs the question of why the safety net remains so threadbare — especially given how much money keeps getting channeled to the spendthrift Americans.

Here’s a more convincing explanation — the Chinese government acts like the nation is too poor to boost domestic consumption faster because it really is. All of China’s new wealth by itself still can’t come close to supporting current employment and income levels nationwide, much less uplifting the masses of rural and urban poor. These challenges can be met — and Chinese leaders kept in power — only through massive sales abroad. Astonishingly, foreign markets remain so crucial that Beijing views subsidizing their consumption — and keeping the nation’s factories humming — as a more promising way to sustain China’s growth than spending directly on the Chinese people.

Why hasn’t this explanation gotten legs? Possibly because it undercuts American outsourcers’ painstakingly constructed portrait of China as a mammoth net opportunity for U.S. exporters, and their insistence that China holds all the cards in the economic relationship by being “America’s banker.” Debunk these claims, and understand China’s biggest dilemma, and the case for maintaining the outsourcing-friendly U.S.-China trade status quo falls apart.

Alan Tonelson is a research fellow at the U.S. Business and Industry Council, a national business organization whose nearly 2,000 members are mainly small- and medium-sized domestic manufacturers. Author of “The Race to the Bottom,” Mr. Tonelson also is a contributor to the council’s Web site: www.AmericanEconomicAlert.org.

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