China versus the US: it is serious

Sure, the US Congressional Budget Office projects that debt could rise above 90 per cent of GDP by 2020 on present trends, but who is to say that the US will not make important policy reforms.

While major policy reforms are being avoided as Western societies cling to a misguided hope that more and more economic stimulus will save the day, a continued adherence to freer trade - in line with recent trends - will merely ensure the demise of the US along with many other Western nations.

It is one thing to argue that economic reform is needed in Western nations, often with some negative domestic consequences. It is another thing to ask Westerners to accept a tougher standard of living while Communist China or other authoritarian nations rise at their expense.

While much of the developed world confronts debt, China continues its spending spree with its vast reserve of US dollars. Although argued that China is merely seeking to guarantee energy supplies given that its consumption far outstrips its domestic supplies, China’s state-owned Sinopec recently clinched a deal ($US7 billion) with Spain’s Repsol to buy 40 per cent of its Brazilian business, thus giving it access to Repsol Brasil’s estimated reserves of 1.2 billion barrels of oil and gas.

There is also ongoing concern about China’s involvement in politically unstable countries, despite China winning such contracts by building vital new infrastructure (including hospitals, ports, and road and rail links). While difficult to prove, China is accused of “paying multimillion-dollar backhanders in return for African leaders repudiating Taiwan at the UN”.

Sure, Western nations benefit from cheap Chinese imports which helps limit inflation and interest rates, but public opinion will carry the most weight in regards to urging a policy mix that better balances domestic production and consumption. This is despite more than half of China’s exports in 2007 being produced by multinational companies, either alone or in joint ventures with Chinese partners, including about 85 per cent of high-tech exports.

Already, the US House of Representatives has passed legislation (vote 348-79) intended to counter China’s currency controls. While the bill (subject to Senate approval) does not impose automatic penalties, it expands the definition of improper subsidies to include currency manipulation to gain a trade advantage.

Some 181 House members also wrote to Obama urging him to take steps to blunt China’s “predatory” actions to gain “unfair advantage” in environmentally friendly “green” technology, and to increase government resources to deal with Beijing’s “increasingly sophisticated unfair trade practices”.

Such action and sentiment is likely to fuel further protectionist tendencies with the US and China already imposing antidumping duties in recent months on chicken, steel, nylon and tyres.

While a trade war between China and the US would have an immense impact on global trade and economic activity, this would mean that other measures will need to be adopted to boost domestic activity and address budget deficits as the world makes its transition from such a high dependence on China’s exports. Because the West’s reliance upon debt cannot go on forever, this may include both major taxation and social welfare reform.

Should such events unfold, this would mark the third wave of reform for Western nations since World War II. The first period (prior to the 1980s) marked the promotion of freer trade, albeit that many nations relied on import-substitution to develop domestic manufacturing (including Australia). The second period resulted in Western nations allowing manufacturing to decline in terms of employment with the importance of services increasing, aided by an unsustainable level of debt (including some dubious practices which culminated in the global financial crisis). The third period, if it emerges, may see a greater combination of the first two trends to achieve a more appropriate policy mix as populations of many democracies demand measures to better balance production and consumption.

Powerful and influential Western nations (led by the US) have important normative reasons not to accept their demise. As the former Chinese national Helen Wang argues, the US “remains the country standing for the universal ideals that people around the world aspire to - liberty and democracy”. Unlike Americans who have a clear message for the world, the Chinese do not have a vision for themselves, let alone to influence the world. I have talked to Chinese officials, scholars, business people and students. None of them see China as a superpower. In contrast, many of them look up to the United States as a model and admire the “American way of life”.