Abstract

The US-China relationship is at its most critical juncture in 45 years.  The election of Donald Trump as the 45th President of the United States leaves little doubt of a major shift in the economic rules of engagement between the two nations.

The initial pronouncements of the Trump Administration point to a wide range of possible anti-China sanctions – from imposing punitive tariffs and designating China as a “currency manipulator” to denouncing Chinese territorial claims in the South China Seas to embracing Taiwan and establishing the long sacrosanct “One-China” policy as a bargaining chip.

This approach suffers from one critical strategic flaw: It is based on the mistaken belief that a newly muscular United States has all the leverage in dealing with its presumed adversary. Yet if Washington were to act along these lines, China would most assuredly retaliate with tariffs and restrictions on capital flows – crimping US export growth and compromising America’s ability to import the surplus saving it needs to compensate for a serious shortfall of domestic saving.

This approach also suffers from a deep analytical flaw: Contrary to the Trump view, America’s outsize trade deficit with China cannot be remedied with tough bilateral tactics.  The US has deficits with 101 nations – a byproduct of the saving shortfall and the current account deficit that spawns.  There is no bilateral solution to a multilateral trade deficit that arises from such macro imbalances.

Putting pressure on China – saving-short America’s low cost provider of foreign goods and external capital – could force the United States to face one of its most formidable challenges: To the extent that China has enabled the US to avoid otherwise tough economic and financial pressures that have been building for decades, the bilateral deficit has actually worked to America’s advantage.  Tearing up the rules of engagement between the two nations could well unmask the tenuous equilibrium in this grand bargain and raise tough questions over how America’s growth equation gets solved without China.

Washington politicians have a long history of blaming China for increasingly chronic economic problems in the United States. The blame game has been exacerbated by the “globalization disconnect” as theoretical promises of a long-term win-win have been compromised by the extraordinary disruptions of the current wave of globalization.  A precarious US-China relationship has been increasingly compromised by the pitfalls of the globalization debate.  Protectionism and isolationism, cloaked in a veil of populism, are not the way out.  Macro problems require macro solutions – more saving by the United States would be an important step in the right direction.