Economy Alters U.S.-China Ties

The effects of the worldwide recession and recovery may change U.S.-China relations for years, economists say.
By Michael Lelyveld
2009-09-08
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BOSTON--Changing economic conditions could affect U.S.-China relations for years to come, with the United States already becoming less reliant on China’s purchases of U.S. securities to support debt.

With the worldwide recession, U.S. consumers have tightened their belts and sharply increased their savings rates.

At the same time, China's troublesome trade surpluses with the United States have been shrinking for the first time in years as its exports dry up, turning it more toward domestic consumption to sustain economic growth.

"All of this amounts to a reorientation of the relationship between the United States and China toward a more sustainable path," Harvard University economics professor Dale Jorgenson said in a Radio Free Asia interview.

"It's a more sustainable situation from the Chinese point of view and also from our point of view," said Jorgenson.

"It's unfortunate it had to be accompanied by a crisis of this type. But big changes like this often occur as the result of a crisis," he said.

Exports, deficit decline

Over the past decade, tension has been building over the massive U.S. trade deficit with China, which soared to a record U.S. $681 billion in 2008. But by midyear, the deficit dropped 13 percent from a year earlier to U.S. $103 billion, according to U.S. Commerce Department figures.

In the first seven months of the year, China's worldwide exports have also declined 22 percent, the General Administration of Customs said.

With declines in spending, U.S. savings rates have hit 15-year highs, peaking at 6.2 percent in May, easing dependence on debt funding from abroad. In June, China reduced holdings of U.S. Treasury bills by the biggest amount in nearly nine years, although it continues to sit on U.S. $776 billion of the securities in its U.S. $2.1-trillion portfolio.

During the export slump, China has been heeding calls to turn efforts toward domestic consumption, a trend that may stimulate imports and help to even the trade imbalance.

"That should relax tensions and make it possible for both countries to focus on the positive aspects of their continuing international relationships," Jorgenson said.

Major adjustments are also welcome because the changes in U.S. spending habits are likely to far outlast the recession.
Jorgenson said that positive U.S. savings rates could last "a decade or so."

Difficult adjustment

One concern is that China may not be able to adjust quickly enough to the changing conditions after years of the export-driven boom, said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington.

"There certainly can be tension," Hufbauer told RFA.

Hufbauer expects that the U.S. trade deficit with China this year will decline to about U.S. $300 billion, or less than half the 2008 level. The improvement will be positive for U.S. political attitudes China and trade generally.
"On the Chinese side, the political adjustment will be harder because export-led growth with big surpluses is not going to be a feature of the next years ahead," said Hufbauer.

"Macroeconomic policy won't permit the kind of go-go export performance that China enjoyed for the past decade," he said. "China may feel put out by that."

As the trade and economic dust settles, China may move to diversify its hard currency holdings and make them less dependent on the dollar.

"I don't think that causes anyone in the United States or elsewhere a lot of discomfort, as long as it's done in a slow and orderly way," Hufbauer said.

Any sudden dumping of U.S. securities would increase tensions, said Hufbauer, but such a move is unlikely because it would also put China's dollar-denominated holdings at risk.

"They just have too much in the way of assets to even consider something like that, and they aren't considering it," Jorgenson said.

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