Monday, December 18, 2006

America goes cap in hand

A falling dollar, growing import deficits, a loss of domestic manufacturing jobs and the election of a more protectionist Congress, which takes office next month, add up to one thing – increasing trade tensions between the United States and its main creditor, China, which could derail the global economy. In the latest twist, hard-pressed US manufacturers have persuaded the Democrats to launch a controversial Bill permitting the use of anti-subsidy laws in response to alleged "currency manipulation" by Beijing. The US trade deficit with China, which is expected to grow to $229 billion for 2006, has allowed China to build up $1 trillion in foreign currency reserves. A high-level American delegation to Beijing last week came away empty handed, however, not least because the Chinese economy has its own severe domestic problems. Leading the attempt to get China to take some of America’s pain was Treasury Secretary Henry M. Paulson, appointed earlier this year from his position as chairman and chief executive officer of the investment bank Goldman Sachs and adviser to the Chinese Government. With him went six other cabinet members and the chairman of the Federal Reserve, Ben Bernanke. At the top of Paulson’s list of "reforms" is getting people in China to buy more goods. Or in the words of his opening remarks: "By continuing to pursue economic reform, opening its markets further, and rebalancing its growth to allow for increased domestic consumption, China will be sustaining its own growth while contributing even more to the global economy."

But the Chinese leadership wasn’t impressed by a delegation which could almost be said to have arrived cap in hand. They are only too aware of the looming revolt against the widening gulf which has opened between the tiny group of suddenly super-rich and the increasingly impoverished hundreds of millions who have lost everything to capitalist globalisation. The current leadership is reported to be moving to rein in the excesses of market economy introduced by Deng Xiaoping. More than two decades after Deng's changes, the per capita gross domestic product (GDP) had risen to only $1,700 in 2005 and is expected to reach only $3,000 in 2020. Even with a purchasing power parity of 4:1, Chinese 2005 per capita GDP was $6,800, still substantially below the US 2005 per capita GDP of $35,000. The lowest-income families, comprising the bottom 10% of all families, owns less than 2% of all the private assets in the economy, while the highest-income families, or the top 10% of all the families, own over 40%. No wonder Chinese leaders have started warning against extremes of poverty and wealth, rising unemployment and intensifying social conflict. There is also recognition China is overly-dependent on foreign investment and energy resources. So, far from rushing to help Washington, Chinese planners are working to make the country more self-sufficient in the next five years. At the end of the talks in Beijing, Vice Premier Wu Yi said "a number of differences remain". She added: "China and America are two completely different countries. The economic structures are different, the value systems are different, so it is natural to have this or that kind of disagreement. The key lies in what attitude is embraced to address those differences." Meanwhile, the US economy teeters on a financial precipice while China has a unique ability to push it over the edge. The fear is that the continuing four-year decline of the dollar will persuade China to start selling some of the mountain of dollars it has amassed. Such a move would destabilise international financial markets as well as starve the US of funds to finance the government’s own deficit. It looks like American capitalism is on its own in its hour of greatest need.

Gerry Gold, economics editor

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