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