Many economists have concluded that solid economic recovery around the world requires fixing the "fiscal imbalances" that have characterized much of the last decade. Those "fiscal imbalances" were, perhaps, direct enablers -- if not a cause of -- the global economic downturn that began nearly three years ago.
By "fiscal imbalances," economists mean the trade and savings/spending patterns characterized in part by export-driven growth in China accompanied by huge current account surpluses, a corresponding trade deficit in the U.S., and an extended period of relatively low interest rates in the U.S. These low borrowing costs fueled the housing bubble and enabled U.S. consumers to buy billions of dollars of low-cost Chinese goods, often to the detriment of U.S. manufacturers. China, in turn, used its substantial trade surplus and dollar holdings to underwrite U.S. borrowing to finance our growing national debt.
Chinese consumers save nearly 50 percent of their income. American consumers, who until recently drove 70 percent of U.S. GDP, saved virtually nothing. Now, given the ravages of the Great Recession, the U.S. personal savings rate has suddenly risen to 5.4 percent, but consumer spending still lags. One reason for the sluggish consumer spending has been the fact that American households are still "deleveraging," working off the enormous debts they accumulated during the "bubble" years. To do this, they have to save more and spend less.
This rebalancing act also calls for the Chinese to save less and spend more. There are clear limits to China's ability to sustain its export-driven growth model -- a model that increasingly shortchanges Chinese domestic consumption, while artificially constraining the value of China's currency, the renminbi.
President Obama and Treasury Secretary Geithner have repeatedly urged Chinese leaders to allow the renminbi's value to rise. Doing so, of course, should slow China's export-driven growth, as the cost to U.S. and other global consumers of Chinese-made goods increases. China responds, by lecturing U.S. leaders about our unsustainable federal budget deficits and growing international debt, our severely weakened manufacturing sector, and by claiming that the second round of quantitative easing by the Federal Reserve amounted to the U.S. manipulating its own currency by weakening the dollar.
The major issue worrying all Americans now is our "jobless" recovery. With unemployment at 9.2 percent, it would help our jobs picture if U.S. consumers would buy more U.S.-made goods. Doing so will reduce our trade deficit and strengthen what is left of the U.S. manufacturing base. One way to achieve the required re-balancing, of course, is through unilateral protectionist measures, such as tariffs and quotas imposed by government, or through prolonged litigation in forums such as the World Trade Organization. We have known for centuries, however, that protectionist trade barriers reduce economic growth, impose additional costs to consumers, and contract, rather than expand, world trade and income. They must be avoided at all costs.
Government-to-government talks have gone nowhere. A more sensible and direct approach, which can complement government talks, is to turn loose the power of American consumers who can immediately, and voluntarily, decide for a period of time to stop buying Chinese-made goods. They can do so to send the Chinese a message (on economics as well as on human rights and Internet freedom) and to help rebuild American manufacturers. Doing so would also benefit China by adding further pressure on the Chinese government to stimulate Chinese internal aggregate demand and wean itself away from its export-driven model. One major U.S. retailer reportedly has some 6,000 suppliers, 5,000 of which are Chinese. If the goods of these Chinese suppliers start backing up on the shelves of that retailer's stores and warehouses, the company might have to seek other suppliers -- perhaps even American ones.
But doesn't this approach risk Chinese retaliation by not purchasing U.S. Treasuries and thereby no longer underwriting U.S. debt and deficits? At some point, if the U.S. budget deficit is not improved, this event will happen anyway, as investors fear that the dollar will drop in value or inflation will suddenly accelerate. Either consequence lessens the value of China's investment in U.S. Treasury bills. The Chinese leaders are not stupid, and we can expect them to take steps to avoid losing the value of their "investment" in the U.S. And if China were to do so -- or begin diversifying its asset portfolio somewhat -- that would also be good for the United States, as we need to wean ourselves away from China's easy money.
Today's fiscal imbalances cannot continue, and they won't. The reality is that both China and the United States have some bitter pills to swallow. Political leaders in both countries are often reluctant to level with the public, but it is better to begin the treatment sooner, rather than later. Neither country will benefit from a trade war, and both countries will benefit from "rebalancing" their economies. Consumers in both countries can hasten this process.
We should welcome China as a competitor -- and as a friend. Both of our economies need to be strong and will benefit from more balanced trade patterns. At the same time, we should not be shy about taking steps to put our own economic house in order while nudging them to do so as well.
America needs more jobs at home, and China needs more freedom, both economic and political. On my first visit to China a few years ago, I recall sitting in a small, provincial airport waiting for my ride to the hotel. A young Chinese man -- probably around 22 or 23 -- sat next to me, and asked if we could chat. His English was good, but I could not understand one particular word. After asking him to repeat it three times, he finally took out pen and paper and wrote: "freedom."
I said, "Yes. Freedom." And then he said, "Your country very good. My country not so good." I looked directly at him and smiled: "Yes, but your country is getting better."
American consumers can help their fellow citizens and our friends in China in their purchasing decisions. A former American president once urged all Americans to "go shopping." When we do, we should try whenever possible to buy American.
________________________________________________________________________
Charles Kolb served in the first Bush White House from 1990-1992 and as General Counsel of United Way of America from 1992-1997. He is now President of the Committee for Economic Development in Washington, D.C. The views in this article are solely the author's.