IN THE past, Superpower Summits were generally bleak affairs overhung by the grim spectre of nuclear annihilation.
The world stopped spinning on its axis briefly when American and Soviet leaders met, and revolved again only when the two exchanged signatures on incomprehensible treaties with names like Salt and Start.
Today, China, not Russia, is America’s chief global interlocutor and this week sees the latest in the modern series of get-togethers when President Hu Jintao makes his first official visit to Washington. Mr Hu is the perfect contemporary counterpart to most of his Russian forebears; less scary, more charm, a hint of the modern technocrat about him.
But if we worry less about nuclear holocaust at these events than we used to (other countries seem to have cornered that specialisation for the moment), the threat we feel is still real, perhaps even more palpable.
Say what you will about the Soviet Union, but the challenge that it represented back then was ultimate and existential rather than immediate and economic. It could, if it wanted, reduce your house to radioactive rubble, but it couldn’t do much about your mortgage rate in the meantime. We didn’t like the idea of the Red Army marching down our high street, but we never had to worry that decisions made in the Kremlin might push up prices in our supermarkets. Nobody who ever visited the Soviet Union fretted that it was going to take his job, unless, perhaps, they worked in large-scale production of obsolescent agricultural machinery.
Yet these days, the world’s other superpower is not, as the USSR was once called, Ivory Coast with missiles. To many in America and Europe, China seems more like a Death Star with Barbie dolls, knocked-off software and fistfuls of US Treasury bills. Economic fear of China, palpable in the US, and increasingly elsewhere in the West, is probably overdone.
Last weekend, just in time for the President’s visit, Beijing posted its latest growth rate — 10.1 per cent apparently in the first quarter. The inevitable question that creeps into some minds whenever the subject of Chinese data crops up is “Who’s counting?” I don’t fully trust economic statistics when they’re published by established agencies in countries the size of Finland, but when you’re trying to measure the output of 1.6 billion people I’m guessing the margin for error is wider than the Yangtze River.
In any case, even if we accept that the broad official measures of China’s economic growth in the past 20 years are accurate, it is actually far less impressive than those of its predecessors as World’s Most Scarily Emerging Competitor. By any standard, at the same stage of their economic development, Japan and South Korea were growing much more rapidly. China is, let’s not forget, still a communist country, with all the misallocation of resources that characterises that unlovely ideology. And, of course, the rapid growth that China has achieved has been bought at the cost of serious financial dislocation.
These are quibbles, of course. nobody would seriously dispute that in the long term, a dynamic country of China’s size is not to be trifled with; it surely will grow to global pre-eminence, and handling that challenge will be for future generations of American (and perhaps, European) leaders the biggest strategic task of the next 50 years.
The more pressing questions concern not the size of China’s GDP and the threats and opportunities that it poses to the US and to the rest of the world, but rather its continuing unusual composition. As is well known by now, China is the counterpart to the US in the global economy. When people talk about global financial imbalances, this relationship accounts for the bulk of them. In fact, China’s current account surplus exactly mirrors the US deficit — at 7 per cent of GDP (though the absolute Chinese number is smaller, of course).
This situation is untenable. The US cannot go on accumulating debt at its current rate. Yet China, too, in this rapid development stage, is in the odd position of exporting capital on the back of a large domestic savings surplus. That makes no sense, either. And so rebalancing the US-China economic relationship is not only desirable but inevitable, sooner or later.
The only question is how. The United States can increase its savings relative to its investment or let the dollar fall. China can reduce its savings or let the renminbi rise.
In the US, there are growing indications that the beleaguered Administration of President Bush may actually be starting to think in terms of a more aggressive policy aimed at reducing the dollar. It’s clear that there is no serious effort to reduce the fiscal deficit, which would help to increase savings and, in a speech that attracted much attention last week, Martin Feldstein, the highly influential economist who was recently passed over as the next chairman of the Fed, called for the US to make an explicit goal of a “competitive currency”. Since John Snow is on his way out as US Treasury Secretary, this might be the moment to bite the dollar bullet.
Not that this approach would be without costs. A sharply lower dollar means higher US interest rates, lower equity prices and, possibly, an unwelcome inflationary surge.
Not unreasonably, the Chinese believe that their fixed exchange rate regime has given them 20 years of economic success. They look at the experience of Japan, which saw its currency float up against the US dollar from the mid-1980s onwards, and they note that it helped to produce stagnation, falling real wages and financial catastrophe. Beijing prefers the export-led, cheap-currency growth that served Japan so well before that.
And yet it is clear that both the US and China have benefited in the short term from what is, by any economic logic an unsustainable position in the long term — the US with lower interest rates, lower inflation, higher asset prices; China from rapid export-led growth that has enabled it to keep its shaky financial system afloat.
Beginning this week, the two sides have to manage the transition from unsustainable nirvana to sustainable reality. It will be an awkward and unpleasant adjustment. But think of it this way — at least it is better than mutual assured destruction.
gerard.baker@thetimes.co.uk
