A Few Low Notes Won't Spoil China-US Harmony


Aug 2, 2007

This commentary originally appeared in South China Morning Post on August 2, 2007.

US-China relations, and the respective national interests which underlie them, are generally harmonious. However, this is occasionally jarred by sharp discord. At present, the discord arises from legislation pending in the US Congress to put pressure on China to substantially raise the value of its "misaligned" yuan, relative to the US dollar.

Washington's aim is to reduce the mainland's large current account surplus with the US (nearly US$200 billion last year) which, it is contended, is appreciably affected by Beijing's deliberate policy of undervaluing the yuan.

The internal American politics behind this measure is complex, and in any event, its economic logic is basically flawed.

The source of China's global surplus — and its surplus with the US — lies in an excess of domestic savings (about 40 per cent of its approximately US$5 trillion gross domestic product) over its domestic investment rate (about 35 per cent of GDP). The American economy is characterised by a precisely opposite imbalance: an excess of gross domestic investment over domestic savings.

If, and when, these basically symbiotic imbalances become unsustainable, tinkering with the yuan/dollar exchange rate will have little influence. Quite different policy changes will be required if, for example, the US savings rate is to be boosted, and China's rate is to be lowered. Moreover, if these changes are to be accomplished without triggering a recession in the US and inflation in China, the exchange rate will be the result — not the cause — of the necessary changes.

Beyond the symbiotic relationships between the two economies, the nations' national interests are in close harmony. Both have a major interest in maintaining and enlarging a free and open global trading system, and encouraging global capital markets that allow free capital flows in both directions, facilitating American investment in China, and vice versa.

As the world's first and second largest importers of oil, the US and China have convergent interests in increased and diversified sources of supply, as well as moderate and relatively stable oil prices. Both also share a strong interest in developing efficient alternatives to fossil fuels.

Energy represents a divergent, as well as a convergent, interest. The more hydrocarbon fuels each consumes, the more global oil prices will tend to rise, to the detriment of other consumers. China's subsidies to households and state enterprises thus harm US energy consumers.

Both nations have vital interests in non-proliferation of nuclear and other weapons of mass destruction. North Korea's nuclear test last October concerned China no less than the US. But Beijing is less inclined to confront non-proliferation in Iran, as that country is a major source of China's oil imports, as well as a growing market for its exports.

The threat of Islamic terrorism and the importance of combating it are of as deep concern to Beijing as they are to Washington, and this impels them to share intelligence, track and interdict financial transactions that may support terrorism, and co-operate in other ways.

To be sure, there are other security issues which China and the US see in a different light. They include China's increasing military spending, the preferential treatment given by the US to India's nuclear development, as well as the Taiwan issue.

In China and America's major international concerns, harmony predominates. That there are, nevertheless, important factors on both sides of the coin brings to mind an observation by F. Scott Fitzgerald about the criterion of a first-rate mind: "The ability to hold two conflicting ideas in one's head at the same time, and still retain a capacity for action."

Whether the minds behind the respective policies in the US and China measure up to this exacting test is an open question.

Charles Wolf is senior economic adviser and corporate fellow in international economics at the Rand Corporation.

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