Monday, November 24, 2014

The Sino-American Decade

HONG KONG – The California summit between US President Barack Obama and Chinese President Xi Jinping on June 7-8 comes at a time of heightened tension between the world’s two preeminent powers. But divisive issues – from computer hacking to America’s “pivot to Asia” – must not claim all of the attention. If Obama and Xi lift their heads above the parapets and begin charting a jointly agreed course through the coming decade, they may find that they have much in common.

The next ten years will be characterized by major structural adjustments and shifts in individual economies, and by a huge reconfiguration of the global economy as a whole. Above all, much depends on the policies adopted by the two largest economies, China and the United States, and their cooperation and leadership in creating global public goods and maintaining a stable and open economic environment.

Cooperation will be needed in many areas. One is the management of natural resources and the environment. The growth of China and the developing world will lead to a doubling of global output in 10-15 years, and probably a tripling in the 15 years after that. The growth model on which both advanced and developing countries relied in the past will not work at two or three times the scale. Climate, ecology, food, water, energy, and livability will not withstand the pressure.

Global problems are hard to solve. A productive starting point would be China-US collaboration on energy efficiency and security, greener growth, and climate change.

China’s 12th Five-Year Plan sets ambitious goals in this area. In the US, progress is somewhat more decentralized, though new national policies have been adopted, including Corporate Average Fuel Economy (CAFE) standards for automobiles. The US also is set to become energy independent, owing to the rise of shale oil and gas, with diminishing reliance on coal already bringing down per capita carbon emissions.

The complementarity of the Chinese and US economies is changing rapidly, but it is not declining in significance. In the past, the US brought a large open market, foreign direct investment, and technology, while China supplied low-cost labor-intensive components in key global manufacturing supply chains. Today, China provides a large and rapidly growing market for a widening array of previously unaffordable goods, and will increasingly produce as well as absorb new technologies. In the process, it will shed lower-value-added jobs in its export sector as production moves to lower-cost developing countries.

Depending on policies on both sides, China may also become a foreign direct investor in the US economy in a wide range of areas – including infrastructure. The US will continue to provide a large open market, even as China’s role in serving it will shift upward in value added and in global supply chains. The US will also provide, share, and absorb technology and human talent, remaining at the top end of the higher-education spectrum and in basic and applied research.

Of course, there is also a healthy element of competition. The sharp differences in comparative advantage that were apparent two decades ago are diminishing as the gap in income, capital depth (including human capital), and capabilities narrows. Chinese multinationals with recognized brands will begin to appear, just as they did in Japan and Korea. They will compete with multinationals from a wide range of countries, and will become architects of global supply chains. Fair, rules-based competition in a rapidly expanding global economy is far from a zero-sum game.

The outlines of the structural changes needed to move toward a healthier, more sustainable growth pattern in the coming decade are relatively clear in China. The remaining questions concern policy implementation and institutional development – issues that will be clarified in the course of 2013, as China’s new leaders formalize and communicate their reform priorities.

The US economy, meanwhile, retains many elements of dynamism and flexibility. But, while GDP growth seems to be returning slowly to potential, the slow pace of recovery in employment and the residual secular shifts in income distribution remain causes of concern. In particular, the shift of income from those who save less to those who save more implies uncertainty about the restoration of aggregate demand.

Political polarization has become another source of uncertainty. Many centrists agree that an optimal fiscal policy would feature short-term stimulus, a multi-year medium-term deficit reduction plan, and measures to reduce long-term liabilities, especially if retrenchment protected growth-oriented public-sector investments. But that is difficult to achieve in a context of deleveraging and fixation on debt.

If current trends continue, with the US economy recovering slowly but steadily, the pattern of convergence with China will continue. East Asia as a whole will surpass the US in terms of aggregate GDP by 2015, with China contributing the highest proportion of the total. China’s GDP is projected to catch up to that of the US and Europe in 10-15 years, at which point (if not sooner) both Chinese and US real GDP will exceed $25 trillion (in 2012 prices), more than three times China’s current GDP. Each will account for approximately 15% of global output.

And yet this shift will be accompanied by very substantial global economic challenges and uncertainties, underscoring the importance of Sino-US cooperation. A constructive, cooperative relationship can make a significant contribution to both countries’ efforts to adapt their policies and institutions to achieve sustainable, inclusive growth patterns.

Beyond the bilateral benefits, the rest of the global economy is dependent on Chinese and US leadership – both in terms of growth and in matters concerning global economic governance and coordination. Trade and economic openness, financial stability and regulation, energy security, climate change, and many other issues confront the world collectively. It is very difficult to imagine successful global rebalancing and progress without China and the US taking a leading role in the process.

  • Contact us to secure rights


  • Hide Comments Hide Comments Read Comments (8)

    Please login or register to post a comment

    1. CommentedYoshimichi Moriyama

      This is unintelligible if we read it as Prof. Spence's prognostication. It is intelligible if we read it as his hope.

      The reason is that China makes different interpretations of economic governance, finacial stability and regulation, and energy security, etc.

    2. CommentedKeshav Prasad Bhattarai

      Many-many thanks for sketching such a beautiful and optimistic scenario of Sino- US relations. The scheduled meeting between the top leaders of these two great power will indubitably exhibits the scale of their political courage, diplomatic skill, foresightedness, and commitment to solve problems that are bigger not only than their countries but much bigger than the size of the earth.

      As the global political, economic and environmental health is getting more complicated and challenging leadership in many countries are making people helpless and disappointed and in such a time, the summit between Obama and Xi will help people all around the globe will make realize - how far American and Chinese people have elected their leader - wisely and responsibly.

      The meeting will become a test case for these two leaders and two people and their responsibility towards the world they are leading these days. Michael Spence has offered them urgently needed to do lists.

    3. Commentedalessandro vitali

      A suggestion on the ending of China demographic dividend would make the picture more realistic. Japan was set to overcome US but everyone knows how it ended.

    4. CommentedNirav Desai

      I think India with a GDP which is close to 1.873 trillion US Dollars, needs to find opportunities for growth as the GDP itself is quite large. However, India's per capita GDP is only 1528 US Dollars and is way behind the rest of the world. India ranks 144 on the per capita GDP front. There are thus a lot of opportunities in the per capita GDP growth of India as it is very low. Per capita GDP growth would mean each person is able to produce more and live better. India ranks in the top 5 countries in the world in GDP value but it ranks at 144 on the per capita GDP value.

    5. CommentedGunnar Eriksson

      A wealth tax with intelligent valuation of capital usage should make it possible to both invest in prioritized areas and reduce debt. The tax should be aimed for idle capital, capital that mainly create speculation bubbles.
      The US, EU and China need this for moving capital to more effective use.

      Combined with increasing wages for the lower end earners growth would return!

    6. CommentedFrank O'Callaghan

      True in so far as it goes.

      There is another issue within the discussion. Productivity and technology have exploded with the twin results of overproduction and unemployment.

      Vast gaps in wealth between the owners and the rest have opened. Without redistribution there will be a necessity to whip up hatreds and hysteria in order to keep the minds of the masses occupied on things other than their own self interest.

        CommentedChuck Mcormick

        Overproduction and unemployment are a bad mix with production ultimately getting the hit. Prices fall and the whole economy falls as well.
        The government would be better off having people clean up parks fora salary than leaving unemployment high God forbid that thought nowadays: rather make the park private , overcharge for use and have as few people as possible maintaining it for as small a salary as possible. that is where things are now.
        Greed blinds.

    7. Commentedhari naidu

      This is a very optimistic scenario of Sino-US cooperation on global (G20) issues.

      What the outlook doesn't (even) consider is the inherent political roadblock by GOP in the Congress, including some Dems.

      Mainland China knows its future development depends on developing its own domestic consumption market; and, as the new Chinese PM did last week in India, developing and institutionalizing economic and financial cooperation with its big Asian neighbor. Two of them have a lot more to gain from substantial economic cooperation, including developing joint industrial tax-free zones along Indian Ocean.

      My guess is whatever Obama proposes to Congress on China will not find receptive ears from Congress. The hatred and political disengagement from mainland China will last longer than generation - in spite of private sector encouragement and FDI.