The objective of the SED from the outset has been to achieve progress on the sorts of structural issues that underlie the trade imbalance: in particular, high savings rates in China and low savings rates in the United States. Toward that end, Treasury Secretary Henry Paulson has been working with his Chinese counterparts to establish health‐, life‐, and disability‐insurance markets, which all serve to hedge against uncertainty about the future. Uncertainty and insecurity thrive in the absence of social safety nets, and they encourage thrift.
Paulson has also been touting the importance of credit markets and credit cards to the Chinese government’s stated objective of shifting the economy’s focus from investment and exports to consumption. American financial institutions will benefit immensely when the use of consumer credit and insurance markets proliferate in China — unless, of course, U.S. policymakers indulge the provocateurs and engage in shortsighted protectionism.
Regrettably, Congress has been too willing to criticize Chinese policies and too unwilling to acknowledge its own complicity in the trade imbalance. By spending far in excess of its receipts, the federal government has played a crucial role in the bloating of the bilateral deficit. The structural changes necessary in the United States, which are far more consequential than any trade policies, concern entitlement spending. Without bold reform to social security and Medicaid, U.S. reliance on foreign capital to cover those expenses will only ensure trade deficits in perpetuity.
But on the occasion of the commencement of SED IV, there are some positive signs on the policy front. Support for the provocative tack in Congress appears to be dwindling. Despite the introduction of dozens of anti‐China trade bills in the 110th Congress, none has passed into law. Even sponsors of the so‐called currency bills are beginning to have second thoughts, as voters begin to comprehend the central role of the declining dollar on gas and food prices. In effect, the economy is experiencing some of the same consequences of protectionism — higher prices and strained consumer budgets — without protectionist measures having been imposed. An additional layer of real protectionism could constitute the tipping point for consumers.
Accordingly, there appears to be little momentum to move any legislation before the end of the term because, frankly, things are working themselves out. The Chinese currency has appreciated by 20 percent against the dollar since the exclusive dollar peg was terminated in July 2005. U.S exports to China are setting new records every year — in just the first quarter of this year U.S. exports to China rose 25 percent, while U.S. import growth from China slowed to 2 percent.
Chinese consumer spending rose 22 percent in April, the highest monthly increase in a decade, driving home the point that if Congress is going to worry about the effects of Chinese competition on the supply side, it can also celebrate the effects of China’s growing wealth on the demand side. The downside of U.S. protectionism is accentuated when the world’s economic growth is occurring outside the United States.
Congress is also seeing more evidence that unilateral U.S. actions on the trade front would be, not only self‐defeating, but superfluous. The dispute settlement system of the World Trade Organization is proving to be a legitimate and viable venue for resolving trade disputes with China. Out of six WTO complaints lodged by the United States over Chinese trade practices, three have been resolved in favor of the U.S. position, and the other three are pending at different stages of the adjudication process.
A significant casualty of any unilateral sanctions from the Congress could very well be Chinese willingness to honor the verdicts of the WTO dispute settlement system, which would constitute the worst possible outcome of U.S. unilateralism. Regrettably, China need look only to the United States for examples of such disregard for the multilateral system.
The SED was never intended to resolve every last gripe about the bilateral trade relationship. Legitimate trade complaints are working themselves out with the occasional assistance of WTO dispute settlement.