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June 22, 2007
Economics and U.S.-China Trade
Pieter Bottelier

According to Pieter Bottelier, adjunct Professor at Johns Hopkins University, SAIS and a Senior Advisor at the World Bank, “China’s rise is without precedent or parallel in the developing world.” As the country gains more economic power and trade between our two nations increase, the race to understand the Chinese economy heightens. Bottelier gave the Policymakers insight into the Chinese economy and the status of trade relations between the U.S. and China. He gave a historical overview of the Chinese economy and their growth strategy. Bottelier also commented on the second round of the Strategic Economic Dialogue (SED) between the U.S. and China that took place on May 22 and 23 in Washington.

When Deng Xiaoping decided to change the economic path of China's development from state planned to market based, the Chinese leadership had no successful example to follow. Before reform, the Chinese economy was very backward and marked by distortions and barriers. While many Eastern European countries were struggling to follow the Soviet method of reform, China developed their own “Beijing Consensus.” As opposed to the former Soviet countries whose reforms were statewide and focused on urban areas, China's reform began gradually on a smaller scale focusing mainly on agricultural areas. If the reforms worked on the small scale they were then expanded and extended to other areas. In addition, when China began its reform period, it did not have a comprehensive plan of where it would take them, rather it was not until the early 1990s that they conceptualized China's Socialist Market Economy. Privatization and restructuring of the State-Owned Enterprises (SOEs) began in the 1990s leading to heavy inflows of investment from abroad, which in turn promoted productivity, modernization, and a more concise legal code.

While many China observers may believe that exports drive China’s economy, Bottelier believes that domestic demand is the prime force behind China’s unprecedented growth. The domestic rate of savings and investment rates in China are unusually high and has helped to fuel development.
Bottelier believes that China has one of the most open economies in the world and that China has been a prime beneficiary of economic globalization.

There have been many comparisons between China and India’s economies as both have maintained astounding growth rates over the last decade. In China, the state has concentrated on infrastructure, urban development and manufacturing to an extent not seen in India. In addition, India looks to China as an example of how to continue their development.

China faces many growing problems. These problems include too much reliance on growth in investment, a tendency to over-invest and create excess capacity, an investment pattern too focused on capital-intensive industries, a weak financial sector, serious environmental degradation, growing disparity between rich & poor, urban & rural, access to social services and inadequate protection of IPR laws. Finally, Bottelier believes that the “combination of growing domestic economic liberalism and continued political authoritarianism is becoming increasingly incongruent.” China's economy is currently highly unbalanced with investment exceeding consumption leading to a situation that not sustainable.

Trade relations between the U.S. and China are particularly sensitive. One of the most talked about issues is the trade imbalance, which was on the table at the recent round of SED. The U.S.'s trade deficit is of high concern to many American politicians and many blame the deficit on China's devalued currency. Bottelier believes that the U.S. focuses too much on China's devalued currency, believing that if the Chinese currency were to appreciate faster it would solve the trade imbalance. However, according to Bottelier, solving the currency imbalance would not solve the trade imbalance. The devalued currency is only a small part of the huge success China has had in foreign trade and growth, high investment and increased productivity being the most important factors in that success. That said, the trade imbalance should not only concern Americans but also has serious impacts for China. China relies too heavily on exporting capital and its investment rates are not sustainable. Bottelier advises the Chinese to build a social security net so that they would no longer feel insecure about saving for their retirement and future and feel more comfortable with higher consumption. Increased consumption for China is a good thing because it would increase the standard of living. Bottelier argues that if the Chinese cannot appreciate the yuan as fast as the American congress demands. If China was to move faster with appreciation, it would cause a huge shock to low-end manufacturing and many jobs would be lost. Foreign companies would relocate to other South-East Asian countries where labor would be cheaper. Agriculture would also be hurt and many small farmers would be put out of business. While Bottelier disagrees with a sizeable appreciation, he does believe that the Chinese have been too slow with appreciating their currency and can afford to move a little faster. Bottelier is supportive of the SED and has high hopes for its future success.

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