Even Chinese officials favor higher local demand. But either they can't or won't stimulate it. Personal consumption spending is a meager 38 percent of GDP; that's half the U.S. rate of 70 percent. People save at astonishingly high levels partly because they're scared of emergencies. The social safety net is skimpy. Health insurance is modest: out-of-pocket spending covers half of medical costs, reports economist Nicholas Lardy of the Peterson Institute. There's no universal Social Security, and only 17 percent of workers have pensions. A mere 14 percent are covered by unemployment insurance.
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The surplus of personal savings, supplemented by business savings and foreign capital, means that Chinese and multinational firms can build more factories—and that raises the need to export. A low currency thus serves two roles: as an inducement to attract foreign investment, and as a tool to balance the economy and to check popular discontent. But for the rest of the world, the consequences are potentially threatening. As China moves up the technology chain, it may become the low-cost export platform for more and more industries. This could divert production from the rest of Asia, Europe, Latin America and the United States.
It is not "protectionist" (I am a longstanding free trader) to complain about policies that are predatory; China's are just that. The logic of free trade is that comparative advantage ultimately benefits everyone. Countries specialize in what they do best. Production and living standards rise. But the logic does not allow for one country's trade systematically to depress its trading partners' production and employment. Down that path lies resentment and political backlash.
Everyone complains about America's trade deficits, but they actually symbolize global leadership. Access to the U.S. market has promoted trade by enabling other countries to export. But the deficits cannot grow indefinitely. Imagine now a trading system whose largest member seems intent on accumulating permanently large surpluses. Nor, it might be added, are these ultimately in China's interests. They drain too much of its production from its citizens and contribute to growing domestic economic inequality. What everyone needs is more balanced Chinese economic growth, less dependent on exports.
Given the immense stakes—literally the future of the global trading system—the Bush administration has been too timid in pushing China to change. The Treasury Department won't even declare China guilty of currency manipulation. No doubt doing so would irritate the Chinese. But avoidance is no solution; the longer these problems fester, the more intractable and destructive they will become.
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