Is China Rising? Is the U.S. Declining?

Clyde’s article, copied below, is based on two premises.  The first is that China has been competing very well (unfairly, perhaps, but well nonetheless) – China is rising.  The second is that the U.S. had not been competing well – the U.S. is declining.  In this Issue in Depth we explore those two premises, and:

• Is China rising?  Will China continue to rise?
• What does China’s rise mean for the U.S.? 
• Is the U.S. declining?  By what measures? 
• What can America do to reverse its decline, and what does that mean for China?

It is important to remember throughout that while the fate of China’s and America’s economies are intertwined (inextricably), America’s decline is not the result of China’s rise.  Similarly, a call to regain America’s competitive edge is not a call to slow the rise of China – it is a call to reverse the decline of the U.S.

America Must Compete to Retrieve its Lost Prosperity

By Clyde Prestowitz

“The consequences of an economic defeat are far more difficult to reverse than those of a military defeat.”

– Japanese Finance Minister Korekiyo Takahashi in 1937

The U.S. has been experiencing an erosion of economic productive power.  America’s telecommunications infrastructure, critical in an interconnected global economy, now ranks 15th in the world.  And in a key emerging industry – clean energy – the U.S. has lost its competitive edge.  What’s more, because of high business tax rates and a lack of federal incentives for businesses to locate here, the U.S. has become relatively unattractive for investment.   In other words, America’s wealth-producing capacity has waned.  It’s not irretrievable, but the hour to do so is getting late. 

Why has America’s ability to produce wealth declined?  Because U.S. lawmakers pursue policies – domestic and international – that are inappropriate for the reality within which we currently live.  Our assumptions about how the global economy should work are really shared only by the United Kingdom – not by Germany, not by Japan, and not by China.

As I wrote in The New Republic, “What’s at issue is a clash between the outdated U.S. orthodoxy of international free markets and the new international reality of strategic globalization – between, on one hand, embracing free trade and eschewing subsidies, even when other countries do not, and, on the other hand, actively using government to promote jobs and trade.”

Instead of basing its policies on false assumptions, the U.S. must understand the global economic reality and respond to it appropriately.  As much as the U.S. implores, neither Germany nor Japan nor China is likely to become like America.  So the task for America, then, becomes one of adjustment – of realigning its own policies in light of this economic reality.

For example, China’s active currency intervention, which holds the renminbi 15-40 percent under value, keeps the price of the country’s exports artificially low.  But it also means that China is in effect setting the price not only of Chinese goods and services but also American goods and services, as well as the value of the American dollar. That currency manipulation has certainly been good for China, but it has not been good for the U.S.  So America must stand up and act in its own self interest, regain control over the value of the U.S. dollar and the prices of American products.

But this scenario, in which America really begins to compete – this imagination of the future of trade between the U.S. and China – is not about the U.S. stopping China from being successful.  It’s not a zero-sum contest.  It is instead about America doing what China has long done – competing, for its own self interest.  It is about America doing what is good for America.

That means the U.S. focuses on maintaining a high standard of living and opportunity, ensuring a wealth-producing base to maintain the American way of life (which means, in part, high-quality infrastructure and education).  It means a social and economic environment within which people can realize that quintessential American dream: that by working hard, they can achieve success.

So what are the ways that America will begin to act in its own self interest?  By. . .

• Launching formal talks in the IMF to address China’s currency manipulation.
• Asking the WTO to rule whether China’s currency manipulation amounts to an illegal subsidy of exports.
• Calling a G20 conference to discuss restructuring the global financial system with an eye to developing policies that would eventually lead to the replacement of the U.S. dollar as the world’s predominant international reserve currency (China’s Premier Wen Jiabao has also called for such discussions).
• Initiating countervailing duty investigations on a broad range of imported products that benefit from the subsidy of the currency undervaluation.
• Offering attractive federal incentives designed to lure multinational corporations to locate (or remain) here.  As I advocated in my piece in The New Republic, the Secretary of Commerce should create an Invest in America office, modeled on Singapore’s Economic Development Board.  Every domestic and foreign business leader visiting the U.S. should hear how important it is to consider investing in America.
• Reducing the corporate tax rate (next to Japan’s, it is the world’s highest) to 15 percent on profits on new investment in tradeable goods and services – to incentivize the production of Made in the USA goods and services for export.
• Developing high-quality infrastructure that rivals other countries’.  I’ve suggested before that American policymakers should create a “Rebuild America’s Infrastructure” program with an Infrastructure Bank at its core to bring America’s infrastructure up to par.
• Creating its own indigenous innovation policies.  Today’s Manufacturing Czar should become a Competitiveness Czar, responsible for identifying industries in which America could compete and proposing measures (including tax incentives and government contracts) to ensure that those industries flourish.

And what are the ways that China will continue to act in its own self interest?  China’s economy has grown at more than 9 percent annually on average over the last decade.  That compares to a growth rate of about 2 percent or less in the U.S. and other developed economies.  Some call China’s growth a miracle.  But it is actually the result of very deliberate strategic planning.  For example:

• Subsidized land, energy, and water; value-added tax (VAT) rebates on exports; tax holidays; outright capital grants; R&D incentives for “strategic” industries. 
• China has long said that certain key sectors of the economy will remain “state dominated.”  Those state-owned companies easily thrive within such protections and are now looking beyond China’s borders to compete globally.
• China improves its technological capability (and thus its productivity) by “learning from” foreign companies invested in China. 
• In 2009 China proposed “indigenous innovation” regulations that will require government procurement to favor products that include Chinese intellectual property.  And the central government has mandated the replacement of foreign technology – chips, software, communications hardware – with Chinese technology in critical infrastructure within a decade. 

Then what happens?  As the U.S. turns to a strategy of boosting its global economic competitiveness, the relative cost of American exports (compared to other world exports) falls; the volume of U.S. goods and services exported around the world rises; the relative cost of Chinese goods and services (compared to U.S. goods and services) rises; and the volume of Chinese goods and services imported into the U.S. falls (as the U.S. satisfies domestic demand with more Made In the USA products).

Compared to the status quo, then – China doing mercantilist policies and the U.S. doing nothing – China must focus on growth led by rising domestic demand rather than by exports.  If China does that, its economy can continue to develop and the Chinese can continue to get rich just as quickly as they are now.  In the U.S., the economy’s wealth-producing capacity endures, and American per capita income continues to rise by about 2% (real trend) a year.

This "imagination" of the future of US-China trade servers as our jumping-off point for Issues in Depth: Is China Rising? Is the U.S. Declining? Jump into the issue below – hear what the experts have to say, see relevant data charts and graphs, read our in-depth analysis, and see relevant news articles and commentary.   All of the expert commentaries, facts and figures, analysis, and commentary are commentable, so please share your thoughts!