What’s good for the world is bad for the U.S. and China

November 12, 2010

This fall, much of the United States seemed to have settled on a narrative for the country’s struggle to adapt, after a debilitating financial crisis, to a post-industrial and post-unipolar global economy: China and its undervalued currency are largely to blame.

Proof that this was a nationally compelling storyline came during the acrimonious midterm election campaign. U.S. politics have rarely been more polarized, but complaining about China was something both parties could agree on.

John Boehner, the presumptive new Republican Speaker of the House, attacked the Democrats for “a stimulus that shipped jobs overseas to China instead of creating jobs here at home.” Harry Reid, the Nevada Democrat who hung on to his Senate seat and his job as Majority Leader, accused his Tea Party opponent Sharron Angle of being “a foreign worker’s best friend” for supporting corporate tax breaks that helped businesses outsource jobs to China and India.

This rare bipartisan consensus is why Americans were astonished to discover, when the Group of 20 gathered in South Korea this week, that in much of the rest of the world, it is the U.S. that is seen as the world’s rogue economic player.

That sentiment erupted with particular intensity in the wake of the Federal Reserve’s decision to pump $600 billion into the economy, a measure emerging market leaders worry will release a flood of money into their countries and which Europeans fear will bring inflation. But the rest of the world’s complaints about the U.S. run deeper than Fed chairman Ben Bernanke’s resort to quantitative easing.

The U.S. criticism of China rests on a fundamental critique of its economic model – an authoritarian system which suppresses domestic demand and artificially lowers the price of its exports. Critics of the United States likewise have begun to articulate a systemic challenge to how the U.S. economy works.

That view is behind the declaration by China’s leading state-backed rating agency that there are “serious defects in the United States development and management model.” Germany has been equally forthright. Finance Minister Wolfgang Schauble told Der Spiegel: “The American growth model is … stuck in a deep crisis.”

The tricky truth is that both perspectives—the “blame China” paradigm, and the “blame America” one—are right. We are at a turning point in the world economy, one comparable to the global grinding of gears around the time of the two world wars. At this complicated and volatile moment, it just so happens that the world’s two most important economic players—the U.S. and China—aren’t fully in sync with everyone else.

Mohamed El-Erian, the CEO of bond giant Pimco, and a former International Monetary Fund economist, described the problem to me thus: “National responsibilities are conflicting with global responsibilities for both the U.S. and China. That is a real problem for the global economy.”

Seen from this perspective, China and the U.S., so often framed as rivals, actually look like twins. Both countries are preoccupied with domestic growth: China sees itself mainly as a poor country that needs to get richer, while the U.S. is grappling with a painfully slow recovery from the financial crisis. But the chosen paths to growth at home in each of these countries – a weak currency and an export-led economy for China; monetary expansion and perhaps a weaker currency for the U.S., too – are unwelcome in much of the rest of the world.

That clash, Mr. El-Erian fears, “will lead to increasingly inward-looking social and political reactions” in many countries. That’s a problem, he thinks, because today’s global economy is designed to be open: “our globalized world is now hardwired to be outward-oriented.”

Poor countries are accustomed to being told by outsiders what they need to do at home if they want to participate in the global economy; in fact, that’s one way you could define the historic role of the IMF. What is different today is that the world’s dominant economy and its rising one are the two countries whose domestic priorities are causing the greatest disruption for the rest of the world.

Small countries are used to accommodating big ones. But big countries are accustomed to setting the rules. Mr. El-Erian believes that “we will be writing about this period as an historic time of fundamental global re-alignment.” A big part of that realignment is figuring out how to balance national needs against global ones, and doing that turns out to be especially hard if you are used to determining the international rules of the game.


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Freeland wrote: “China sees itself mainly as a poor country that needs to get richer, while the U.S. is grappling with a painfully slow recovery from the financial crisis.”

I’d phrase it like this: China sees itself mainly as a poor country that needs to get richer, while the USA is busy successfully transferring wealth from the middle class to the elites via Wall Street.

Both political parties believe in outsourcing, but neither will admit it. For every Illinois Representative Danny K. Davis (D) who flies to China to help a friend create a factory there, there is a Jeff Bezos who creates an Amazon with customer support based in India, and a Carly Fiorina who vehemently believes in outsourcing high-tech jobs to India and China.

The world still looks at the USA as the world’s Walmart, where Americans buy the majority of the products. Those days are gone forever, as the service sector jobs which replace the middle class jobs outsourced overseas will no longer support such a lifestyle.


Posted by saucymugwump | Report as abusive

The first half eloquently writes about how the US is viewed as the rogue state by the G20. But then the second half of the article in a disingenuous attempt to sound balance says BOTH views (our view’s and china’s) have merit.

China is predictable and that goes a long way toward helping the world economy. Also, they aren’t actually devaluing their currency, just not raising it as fast as we’d like. This arbitrary point will never be reached to our satisfaction as it is not the real problem anyway.

We are unpredictable. We are short-sighted. We change interest rates (which directly affects currency) rapidly and recklessly. We criticize others for nationalizing industries and then do the same. We criticize others for subsidizing and then bailout on a scale far greater than anyone we ever criticized. We pretend to want consensus and then unilaterally and suddenly print money (QE2). We bicker and overspend at the federal, state, and personal level.

We have no merit. We are the rogue state. China is the whipping boy, and we are the bully, hoping to gain popularity by bashing someone else. In reality we are cowards, we can’t fess up to our own problems.

Posted by mgunn | Report as abusive

Why all the “tiptoeing” around the issue? China has not traded fairly for well over a decade. They are not alone in this, but they are the “poster child” of bad trade practices. At what point do you expect these practices are to end, if no disciplinary practices are taken? The west is like the metaphorical donkey chasing a carrot that is always out of reach. Yes China could be a huge market…but they have to let you in if your going to take advantage of the opportunity.
Western economies are in shambles because we can’t get access to their markets, and can’t compete in our own with the huge advantage in part due currency manipulation. So trade is effectively a one way street.
Do you believe in Capitalism or not? Capitalism requires open healthy competition on a level playing field, the current situation is untenable. Protectionism is bad, so why do we ignore it when it has been going on in Asian economies for so long?
If it were not for social programs such as pensions, welfare and unemployment, which did not exist in the 1930’s than this time period would look a lot like the “great depression”. The real unemployment rate is closer to 17% in the U.S. ,but if you have given up looking or are under employed, then you are not considered unemployed. Like it or not trade between nations needs to be leveled or else printing money to buy foreign goods will have to continue. The prospect of printing enough money to devalue the currency to be competitive with China is truly unpalatable.
Consider steel, which is something whose price is generally a function of the costs of energy and raw materials, plus transportation costs. Labor costs should not be the deciding factor, especially when one considers the cost of transport across the ocean and then by rail half way across a continent. Though the U.S. may not be competitive when it comes to exports, it should at least be able to support its own market. Since some of the raw ingredients actually originate in North America the current situation seems even more implausible. If North America cannot even manage to make its own steel, then the situation is truly dire.
I know a lot of people are saying it was the housing bubble that created all the current woes, but it is more the symptom than the cause.
Consider if U.S. manufacturing had not been closing down plants here, and moving them overseas at the rate they did. Once interest rates were lowered and housing started to take off, then housing construction would have started to compete with manufacturing for labor, which would have created wage inflation. Once inflation started to appear then, interest rates would have been raised, which would have slowed housing and the bubble. Alan Greenspan did not factor that the housing bubble was being supplied with labor by a diminishing manufacturing sector. This allowed interest rates to remain low much longer than normal, and this resulted in over building of housing. Now that the last nail has been hammered, those unemployed construction workers have no factory to go back to.
One of the only hopes to reduce the trade deficit, in the near term is to substitute foreign energy for domestic labor and materials. By putting some of those unemployed construction workers back to work doing green renovations on existing homes, then we will at least in part be reducing the problem. Since the hardest hit sector is housing, and there are too many homes already, then this is one of the only ways of creating jobs in this sector of the economy. Energy efficiency has a better “rate of return” than most green solutions. Take out that old oil furnace, and replace it with a ground source heat pump, and you will have permanently reduced the amount of oil needed in this country every year. Do it in a million homes, and businesses and it can really start to add up. Couple this with better windows and insulation, and you’ll reduce the need for electricity in the summer, as well. Had you as a home owner invested in your home this way 10 years ago, you would have had a much better return than on the stock market over the same period.
Why are Canada and Australia doing so much better than other western nations? They never changed much during this time, they have huge natural resources and they ship it to the factories that want them. Since the factories are now in asia, that is where their metallurgical coal, and iron ore now goes. Housing did not get as out of hand there, partly because of better banking regulation, but also it could not without causing the aforementioned increases in wage prices, resulting in inflation and higher interest rates.
Unions should share some of the blame here as well. Their intractable nature regarding job security, while demanding higher benefits and wages, has made it difficult to make products here. Over the last 20 years we should have seen a revolution in manufacturing that would have made our factories look like something out of the “Jetsons”. Higher wages with less people and more advanced equipment that would have resulted in the productivity gains necessary to remain competitive. Companies could employ the latest technology, and pay for this equipment with savings from a reduced workforce, but Unions not only demand high wages but job security as well. So we see the inevitable attrition of the workforce through retirement, and lackluster productivity gains. It takes a community to run a factory, not to mention investors and engineers, so why is the life of the community decided solely by the Union leadership who quite often do not even live in that community? If you think I am wrong move a plant to the middle of the desert, and see how much of the workforce wants to live there without; garbage collection, schools, hospitals, etc.
I do not want workers to be taken advantage of, but I also believe that it is better to have some jobs than none. Ideally there would be a lot of high paying jobs servicing and building this new automated machinery. A new deal or balance needs to be sought. Right now we are racing to the bottom, when in this day and age we should be striving higher. Higher minimum wages would be a good start, since so many minimum wage jobs are now in the service sector, and wage increases will not affect manufacturing. If the government were to implement a higher minimum wage, and certain manufactures were going to be unduly affected, then we could consider a one time modernization or productivity loan to keep those industries here. Things have gotten so bad that direct government intervention will be needed to avoid major social upheaval and pain.
To some this may feel a little like the 70’s and early 80’s and you are thinking we got through that. Unfortunately that recession was due in part to Japan practicing the same economic behavior, and I suspect it is where China learned it from, as well as South Korea. Those countries Korea and Japan, had few natural resources and limited populations, so they reached their economic potential fairly quickly. This time we are dealing with a much larger population in China, as well as other nations getting into the game. This period will be longer and more painful than before and if we do not manage it with skill and wisdom, we all will suffer.
If I have not made you feel worried yet, then consider what happens when federal and state governments start to pare back spending to balance their budgets. This over spending has not been due to evaporation of the money, it has been going to workers through out the economy, once they are put out of work in order to balance the budget, you will find the economy shrink further. The end of the wars in the middle east will result in large numbers of ex soldiers looking for work, further adding to the unemployment woes of the U.S. Reduced military spending will help to balance the budget, but if unemployment rises, then government revenues will fall with a lower tax base on which to draw from. If we are not careful it could be a viscous circle of higher unemployment followed by lower government revenue and further cutbacks to balance the budget.
Considering the dangers of all this, printing some money today seems the lessor of many evils. It is not a solution, but is buying some time to make the necessary structural and trade changes.
The Chinese people have worked hard for a better life and a brighter future for their country, letting their currency rise, and investing in a cleaner environment and better social programs would not only create jobs at home in China, but give the people some of the rewards they have worked so hard for.
Good luck to us all.

Posted by Treeherder | Report as abusive

In a nutshell, the chinese moral argument is:
we have a lot of poor people. If our average standard of living has to come even close to usa we have to run up years and years of trade surplusses.

the us moral argument is:
we have got used to a very high standard of living, its tough to give that up so give us a break.

in the real world ofcourse its not a case of right and wrong but weak vs strong. so both sides will flex until one or the other wins. QE2 is indeed at least partly usa flexing its muscles against the chinese resolve to hold down the yuan.

Posted by shivers1 | Report as abusive

It’s pretty rare to read four stupid comments in a row but such were the last four!
Both countries are engaged in an unhealthy diet. Both need to change before the disagreement degenerates into war, something we haven’t seen in a long time.
The American economy is an open one and, even though it indulged in the delices, it is not to blame.
American can and will protect itself against the chinese. What it needs to do ideally is make that threat credible in the head of the chinese. Once they’ve done that, China will back down (or go down the path to war and we’ll have two trading blocks as we used to have).

Posted by Seb1 | Report as abusive

My view is that this acticle is just useless. It didn’t convey to anything at the end. The truth is that the writer, wrote this because she needs to write about something. So the safest way to write something is to be politically correct and to move the readers in a full circle back to it’s clueless original position.
It was a waste of time for the writer as well as for the readers and for me for taking the time to write a comment.

Posted by axiom321 | Report as abusive

Its same old politics,sweet talks without results

Posted by AmJay | Report as abusive

Everyone still loves to ignore history and context, witness the the comment which sounds as if the two “moral” arguments presented for the US and China are historically comparable.

If forced to choose a side, I will come down on the side moving the greatest number of people of this planet forward to a better life. Yes, including all the petty arguments about what’s valuable to living.

Posted by Eideard | Report as abusive

El-Arian has articulated the problem very analytically…The root of the problem still lies in the perspective of the dominant powers trying to protect their self interests and do not align them with the global world…But, it will be clear to them that there is no other way but international cooperation where the voice of the majority will be heard not just the few…That means the beginning of a new economic system…
The hope is not far…

Posted by SCiltas | Report as abusive

Don’t get me wrong, I’m not an Isolationist, however from an economic perspective we DO need to focus internally for a while. One of our problems as a Nation is that we have catered to special interest countries and internal market pressure for cheep goods. As a result we don’t have enough viable manufacturing inside our own borders. One of the reasons for the sluggish recovery from our recent crash is that we are missing a strong manufacturing base. Every viable country must have one. We need to grow our again.

Posted by Tom_MacKnight | Report as abusive

I agree with axiom321 100%

Posted by jay_tee | Report as abusive

“China and its overvalued currency are largely to blame.”

The constant complaint for the past few years has been that the Chinese undervalue their currency relative to the dollar.

A common figure used to explain income disparities between the US and China is that Chinese workers make the equivalent of between 3 and 4 thousand US dollars per year. I suppose one could argue that if a person makes 3 to 4 thousand dollars and can live on that, that means the currency they are using is very valuable – that it has a strong purchasing power.

This country maintains that they are supposed to allow their currency to rise in relation to the dollar. Their complaint is that it could fuel domestic inflation and make their goods less competitive on the world market. They want to sell their output to more than the US. But if it rises to parity with the US dollar, doesn’t that also make them more capable of buying everything the US also needs, like oil and raw materials. But they have their cheap labor while the US will be sinking under inflation. Cost of living issues will get harder here while they will still be able to produce more sophisticated goods at a fraction of the labor costs of the US.

How can the Renminbi be both undervalued and overvalued at the same time?

Isn’t the real problem not the valuation of their currency, but that they have over a billion people paid low wages and yet they can live an adequate life but without the frills?

I also have a little problem thinking that WWI was fought for economic reasons primarily. What economic grinding of gears that aren’t always grinding in times of peace or war? It is so much easier to explain WWI as an explosion of military paranoia and those automatic defense treaties that the major European powers had established between themselves. WWI was a grinding of national egos and an attempt to kill off their rivals. All of them were competing for resources in the rest of the world. Empires aren’t full of “nice” people. The European powers would have slit each other’s national throats if they could have succeeded at it without too much harm to themselves.

Perhaps what was really going on with the First World War was an attempt to kill off surplus males who may not have had a place in the very class-conscious European societies. They were drowning in national testosterone and WWI was the result. While they were draining each other’s national treasuries and gene pools, the US was quietly – until the very last year, building its infrastructure and industrial capacity.

Doesn’t that sound sickening familiar? This country seems to be engaged in an attempt to build a modern world empire with satellite states while the Chinese are tending to their shops.

Isn’t it so often the case that the folks who make the lasting fortunes aren’t the ones going to war or rushing for the gold fields, but the guys selling them the tools of their trade?

Posted by paintcan | Report as abusive

Living 10000 miles from the US its like having a neighbor who lost all their money at the casino and then wants every other household in the street to give up their jobs so the US can still brag about being rich.

Posted by B0Bness | Report as abusive

I have deep heritage with China, but I can’t stand their side anymore. I am glad I granted US citizenship. Because China’s demand is never-end for sure. They should not pull outsiders down for their mess.

I agree with this article very much.

Posted by studentchy | Report as abusive

Whether we like it or not the US is dead; the empire is dying, the monetary system is finally way overdue to implode and the politicians have reached the point where their collective stupidity is too much to bare.

China wants to be the next superpower and they are positioned to do it so why would they not do it?

They own a trillions of US debt and hold the strings now. Americans are stupid for allowing this situation to come about. Especially stupid after watching Britain do the same darn thing right before their eyes.

How can you run a county without manufacturing? Every great empire has suffered this catastrophe and yet the US still didn’t get the lesson; instead it joined NAFTA and CAFTA and even more trade agreements. And yet the so-called experts think more free trade is the answer.

You are not going to save the USA via free trade because China will undercut you every time and take advantage of your free trade system.

A country that can’t even decide if illegals are illegal and sues its own states and does unbelievably stupid things such as this hasn’t a chance of getting together, collectively and effectively enough to pull itself out of an empirical meltdown. Not a chance. Stupidity reigns supreme.

Posted by AnonymousOp | Report as abusive

Doesn’t the writer mean UNDERVALUED??

“China and its overvalued currency are largely to blame”.

Posted by Simplerman | Report as abusive

The true present world currency problem is that the control of world trade/reserve currency US dollar rests with US. Instead world must come out & agree for its replacement with IMF dollar controlled by IMF.
In fair days US remained the biggest consumer of goods & services produced by China & rest of the world on its borrowing strength, US dollar being FX reserve currency of almost all the countries, without paying any heed and providing for repayments of international or domestic debt in its true value and not depreciated value by printing dollars at sweet will. So present fiscal crisis & economic crisis is the result of mismanagement of economy of US by its past governments. That fact is that US spent more than its savings….. unfortunately saved nothing for the rainy day except resorting to printing dollars!
Will this solve US problems? I am not very sure till US leaders, be those Republican or Democrats, make a common resolve to execute essential restructuring to pull its economy out of the mess instead of blaming each other for past failures. Are they prepared to gird up their loins to meet the challenge? I am keenly watching from my rooftop!

Posted by vksaini | Report as abusive

I’m one of those who agree this op-ed was a waste of time for all concerned. If the opinion had been written by an East Asian, it might have been worth something. The opinions of Westerner occupational propagandists are worthless garbage.

Posted by FirstAdvisor | Report as abusive

“bla, bla, … after a debilitating financial crisis, to a post-industrial and post-unipolar global economy: China and its *OVERVALUED* currency are largely to blame.”

This is plain wrong. The chinese currency is undervalued from the US perspective. Luckily, the author uses cool sounding words such as ‘acrimonious’. Otherwise we might think that she is outright incompetent.

Posted by asdfghjklqwer | Report as abusive

The Fed Reserve is right. By releasing 600 billion USD into the global system, it puts pressure on any country that has unfairly fixed its currency to the dollar (China). This will lead to an almost immediate inflation risk on said cheater (China). Which is why the inflation rate in China has already hit 4.4% and will likely pass 5% next month. The only way for such a cheater to stabilize its currency would be to either increase their base interest rate or revalue their currency.

This is a technique intended to hit China and force a revaluation without confronting China over its unfair practices. On the down side, it also affects all other major currencies based on the liquidity of the global currency market. IE: 5% markdown for China and a .3% mark down for all non-cheaters. Which is the cause of so much sniping during the G20.

Posted by kc10man | Report as abusive

The Fed’s responsibility is not to the rest of the world, it is to the citizens of the U.S. If it cannot perform its function in their interests it will be replaced.

Right now the U.S. has an unemployment problem that promises to lead to social unrest. It would seem given the magnitude of that problem, the Fed has missed on half its charter, which is full employment.

The QE2 is absolutely going to lead to inflation and devaluation. Find me any other time in history where that volume of stimulus has not had that affect. It reduces, for a large number of Americans, their overall standard of living. Given the jealousy of the U.S. in the rest of the world, I should wonder that they aren’t cheering at that, except of course, as ours goes down, so does theirs.

Ah, and there’s the rub, they can’t have it both ways. They want the U.S. to step up spending so they don’t suffer, but they only want us to spend hard money, which we seem to be in short supply.

As to China, their days as mercantilists are about over. Maybe they should learn to talk to the Japanese about what that means.

Posted by ARJTurgot | Report as abusive

So ultimately, the great subject economics and its trend to make it a science subject by inserting some formulas has miserably failed and now it led to the kitchen room’s global economy of the TWO super powers.

The world should become pragmatic and should avoid following the two fighting bulls. If the two are fighting based on their domestic economy and financial matter to impose on the entire world their formulas and that neither of their formulas will have positive impact on world economy and financial global problems. Then they should compensate the poor and under developed country incurring loss for these two supper powers follies. Moreover, when there is specific mention in the article that “what is good for US and China is bad for rest of the world” obviously for these two supper powers..

Does that need to be elucidated further for the rest of the world? I do not think it is needed.

Posted by KINGFISHER | Report as abusive

@ KINGFISHER: nice to know the Indian point of view.

I will choose to project the point of view of anyone on earth with a decent amount of wealth. Economics, like citizenship, are fickle and should be seen as such. Chosing which economy and which society to belong to should be made a pone the line of what said society can in the long run provide. Nationalism is dead for people whom possess wealth and citizenship should be considered more of as an insurance plan.

PS: My quality insurance plan in China costs me about 500 USD a year, covers me for any illness and requires no other monetary payments. While my statement may seem to deviate from the main topic, it is in fact central to the idea of economics. If I can get a better deal somewhere else, shouldn’t I?

Posted by kc10man | Report as abusive

A AnonymousOP; Very well said Sir/Ma’am. America has indeed gone down the same debilitating road that England did in the 1880’s. Manufacturing has found a new home and now the US must rely on other bases of economic support such as services, and may I say, intellectual crafts. But manufacturing is not entirely dead. According to our beloved Reuters, the US made approximately 51% of the goods consumed in this country last year, not counting food.

But, I expect that to continue to shrink so long as our borders remain so porous and open to upper class intentions.

Congrats once again to all those whom elected officials who will inevitably extend tax breaks to the same rich that have probably shipped your job overseas. Ya’ay to small government, less jobs, no regulation and a bigger military!

Posted by kc10man | Report as abusive

Ms Freeland: If you are going to change your wording after the fact, please be kind enough to remove my post. That was a cut and paste and not a typed extract of your first version of this article.

But I appreciate that I may have made my point as have so many other writers on this subject.

I suppose anyone can make a typo?

Posted by paintcan | Report as abusive