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5 Paulson, China and the turmoil
beneath By Henry C K Liu
US Treasury Secretary Henry Paulson, an
expert on China with more than 70 business trips
there as a private banker, is in China with six
other cabinet members and the chairman of the
Federal Reserve, Ben Bernanke, to discuss US-China
trade relations.
The venue is the first
meeting of a newly created semi-annual Strategic
Economic Dialogue. Reflecting the growing
relationship between the US and Chinese economies,
this dialogue will occur at the highest official
levels and is the first of its kind. It will
provide an overarching
framework for ongoing productive bilateral
economic dialogues and future economic relations.
It will examine long-term strategic issues, as
well as provide coordination among the specialized
continuing dialogues. The Strategic Economic
Dialogue will also be a forum for discussing ways
the United States and China can work together to
address economic challenges and opportunities as
responsible stakeholders in the international
economic system.
The underlying
issues There is much that is dysfunctional
and unsustainable in US-China economic relations.
The unhappy situation is the natural result of
inequitable terms of trade that have evolved over
two decades, beginning with China's economic
opening to the outside world in Deng Xiaoping's
reform policy introduced in 1978. Since the end of
World War II, the US has conducted foreign
economic and trade policies on the basis that
trade with the US is a favor the rich US economy
grants to the poorer economies.
The
conditions that render such an attitude operative
have changed as the US, in an interdependent
global economy, has become addicted to low-price
imports to fuel its loose monetary policy based on
dollar hegemony. The US economy now is dependent
on foreign trade as much as, if not more than, the
exporting economies. Victims of addiction are
usually not in any position to dictate the terms
of supply.
Trade deficit is in US
national interest A case can be made,
although few in the United States are
intellectually honest enough or politically
courageous enough to make it, that a rising trade
deficit is in the US national interest, just as a
strong dollar is in the US national interest.
Dollar hegemony, a term that describes the
effect of the US dollar, a fiat currency, assuming
the unmerited role of the key reserve currency for
international trade, enables the US to use its
capital account surplus to fund its trade deficit.
For this reason, a balanced trade with the rest of
the world would dry up the capital account surplus
and create serious structural problem for the US
financial system that needs US$3 billion of net
capital inflow a day to keep afloat.
Many
in the US fear a new threat to the sustainability
of US hegemony emerging in the form of excessive
dependence on foreign capital and growing foreign
debt. Former treasury secretary Lawrence Summers
of the Bill Clinton administration observed that
"there is something odd about the world's greatest
power being the world's greatest debtor".
Actually, what is odd is US foreign debt
being denominated in dollars, a fiat currency that
the US and only the US can print at will. The
United States is the only nation in the world
whose foreign debt is denominated in its own
currency. In that sense, the US has no real
foreign debt as all its debts are sovereign debts
payable in currency it can issue at will. The term
"foreign debt" usually means debt denominated in
foreign currencies. Such debts require the backing
of adequate foreign reserves because the debtor
governments cannot print foreign currencies and
are therefore subject to risks of default on
foreign currency loans. Foreign debts for the US,
as they are denominated in dollars, are only
sovereign debts held by foreigners. If foreigners
holding US sovereign debt want to cash them in,
the US can print as many dollars as it needs to
satisfy them.
Therefore the US does not
face risks of default on its foreign debts. This
is what makes US sovereign debts relatively safe
investments, as sovereign debts are not exposed to
default risk, only foreign-exchange risk. The key
behind the intrinsic value of the dollar is that
dollars, and only dollars, are accepted by the US
government for payment of taxes and all other
governmental receipts. These characteristics,
known as the State Theory of Money, make the
dollar a political instrument exempted from rules
that govern financial instruments.
A
new approach to China After his first major
speech that signaled a new US economic approach to
China, Paulson told the Financial Times on the eve
of his first trip to China as treasury secretary
(on September 22) that his message to China was:
"We want you to succeed." Paulson said: "The
United States has a huge stake in a prosperous,
stable China - a China able and willing to play
its part as a global economic leader." He said the
US and China shared areas of economic interest,
highlighting energy and the environment as two
specific areas where the two nations should work
together.
No doubt Paulson is sincere when
he says what he recommends for China is in China's
own interest within the context of neo-liberal
ideology. Yet Paulson's formula for China is that
the US wants China to succeed only on US terms.
Paulson's approach is based on the assumption that
neo-liberal economic reforms in China are
"necessary to sustain its growth" despite heated
policy debate now raging in Chinese policy circles
on the desirability of
