Pick up a newspaper or turn on the television and it is hard to escape the coverage of President Obama and President Xi’s summit meeting in California over the weekend.
Journalists have rightly pointed out the historical significance of the summit, its unusually informal character and the desire of both leaders to forge a personal connection. When it comes to the topics discussed, news reports have highlighted discussions on North Korea and cyber espionage. There is no doubt that those issues are important and that the nature of the summit is worth remarking on. However, the real story from this summit is the failure of Mr. Obama and Mr. Xi to make real progress on the most pressing issue of the U.S.-China bilateral relationship: global imbalances.
According to the Bureau of Economic Statistics the U.S. current account deficit stood at $110.4 billion for the fourth quarter of 2012. America has been financing this gap by issuing debt. With the national debt approaching $17 trillion and the federal budget deficit standing at $1.1 trillion in 2012, it is clear that the current pattern is not sustainable. Reverse the picture and China holds over $1 trillion in U.S. treasury bills and had a $65.8 billion trade surplus in the fourth quarter of last year. Yet China’s economic output has slowed considerably as of late, signaling the nation’s export-led growth strategy may be running out of steam. In short, the U.S. needs to export more and China needs to import more while not provoking a run on the U.S. dollar, a spike in U.S. borrowing rates or a disorderly correction leading to a second global recession.
This is the challenge facing the President Obama and President Xi. Correcting these imbalances in the world economy in a responsible and timely manner will determine whether the world plunges back into economic crisis or moves towards more robust growth. Yet both leaders have remained almost silent about the need for a long-term cooperative strategy on imbalances. The lack of progress on this issue should be a critical concern to people across on the globe. It is the real story to come out of the Obama-Xi summit.
There is no doubt that other issues such as stemming Chinese corporate espionage are important. Cyber hacking undermines international law, diminishes intellectual property rights and threatens progress in cooperation at international organisations including the WTO. This is aside from the clear economic costs, estimated to be around $13 billion in recent years. These costs are significant and the issue should be addressed.
However, they do not nearly compare to the costs of a potential disorderly correction to the U.S. or Chinese trade position. Increasing exports takes much longer than reducing imports, so an economic crisis bringing the U.S. back into trade balance would come almost exclusively from the import side in the short run. That means a potential 3 percent drop in U.S. imports or in other words a 3 percent drop in consumption leading to an equivalent drop in GDP. That is enough to push the world into recession and it ought to be enough to top the headlines. Failure to make progress on imbalances ought to be the clear takeaway from this weekend’s summit. The mainstream media has this story all wrong.