Sav­ing deficit, not China, threat­ens Amer­i­can dream

China Daily (Canada) - - LIFE -

US politi­cians in­vari­ably be­moan trade as the en­emy of the mid­dle class, the ma­jor source of pres­sure on jobs and wages. The cur­rent pres­i­den­tial cam­paign is no ex­cep­tion: Repub­li­cans and Democrats alike have taken aim at both China and the Trans-Pa­cific Part­ner­ship Agree­ment, hold­ing them up as the scourge of be­lea­guered US work­ers. While this ex­pla­na­tion may be po­lit­i­cally ex­pe­di­ent, the truth lies else­where.

When it comes to trade, as I re­cently ar­gued, the United States has made its own bed. The cul­prit is a large sav­ing deficit, the coun­try has been liv­ing be­yond its means for decades and draw­ing freely on sur­plus sav­ing from abroad to fund the great­est con­sump­tion binge in his­tory. Politi­cians, of course, don’t want to blame vot­ers for their profli­gacy; it is much eas­ier to point the fin­ger at oth­ers.

The sav­ing cri­tique mer­its fur­ther anal­y­sis. The data show that coun­tries with sav­ing deficits tend to run trade deficits, while those with sav­ing sur­pluses tend to run trade sur­pluses. The US is the most ob­vi­ous ex­am­ple, with a net na­tional sav­ing rate of 2.6 per­cent in late 2015 – less than half the 6.3 per­cent av­er­age in the fi­nal three decades of the twen­ti­eth cen­tury – and trade deficits with 101 coun­tries.

The pat­tern also holds true else­where. The United King­dom, Canada, Fin­land, France, Greece, and Por­tu­gal – all of which have large trade deficits – save much less than other de­vel­oped coun­tries. Con­versely, high savers like Ger­many, Ja­pan, the Nether­lands, Nor­way, Den­mark, the Repub­lic of Korea, Swe­den, and Switzer­land all run trade sur­pluses.

Sav­ing im­bal­ances can also lead to desta­bi­liz­ing in­ter­na­tional cap­i­tal flows, as­set bub­bles, and fi­nan­cial crises. That was the case in the run-up to the fi­nan­cial cri­sis of 2008/2009, when global sav­ing im­bal­ances, as mea­sured by the dis­par­i­ties be­tween coun­tries with cur­rent-ac­count deficits and sur­pluses, hit a mod­ern record. The as­set and credit bub­bles fu­eled by those im­bal­ances brought the world to the brink of an abyss not seen since the 1930s.

Here, too, there is con­sid­er­able fin­ger point­ing. Deficit coun­tries tend to blame the yield-seek­ing “sav­ing glut” that sloshes around in world fi­nan­cial mar­kets. As for­mer US Fed­eral Re­serve Chair­man Ben Ber­nanke put it, if only coun­tries like China had spent more, the bub­bles that nearly broke the US would not have formed in the first place. Oth­ers have been quick to point out that the US’ sup­posed growth mir­a­cle prob­a­bly could not have hap­pened with­out the cap­i­tal pro­vided by sur­plus coun­tries.

The pru­dent ap­proach would be to strike a bet­ter bal­ance be­tween sav­ing and spend­ing. That is par­tic­u­larly im­por­tant for the US and China, which to­gether ac­count for a dis­pro­por­tion­ate share of the world’s sav­ing dis­par­i­ties. Sim­ply put, the US needs to save more and con­sume less, while China needs to save less and con­sume more. To suc­ceed, both coun­tries will have to over­come en­trenched mind­sets.

On this front, China has been lead­ing the way, with a strat­egy of con­sumer-led re­bal­anc­ing that it in­tro­duced five years ago. The re­sults so far have been mixed, as in­ad­e­quate fund­ing of a so­cial safety net con­tin­ues to tem­per the sup­port to house­hold in­comes pro­vided by ser­vices­driven job cre­ation and ur­ban­iza­tion-led

in­creases in real wages. But China has lately shown a com­mit­ment to ad­dress­ing this short­com­ing. Its re­cently en­acted 13th Five-Year Plan (2016-20) aims to dampen feardriven pre­cau­tion­ary sav­ing through in­ter­est-rate lib­er­al­iza­tion, the in­tro­duc­tion of de­posit in­sur­ance, the loos­en­ing of the hukou res­i­den­tial per­mit sys­tem (which would im­prove ben­e­fit porta­bil­ity), and re­lax­ation of the one-child fam­ily plan­ning pol­icy.

The US, how­ever, is headed in the op­po­site di­rec­tion. There is no in­ter­est in de­bat­ing the sav­ing is­sue, let alone im­ple­ment­ing poli­cies to ad­dress it. A pro-sav­ing US pol­icy agenda should dra­won the fol­low­ing: longert­erm fis­cal con­sol­i­da­tion, ex­panded in­di­vid­ual re­tire­ment accounts and 401Ks, con­sump­tion-based tax re­form (such as value-added or sales taxes), and in­ter­est-rate nor­mal­iza­tion. In­stead, US politi­cians con­tinue to fo­cus on keep­ing the con­sump­tion binge go­ing, re­gard­less of its im­pli­ca­tions for the US’ sav­ing im­per­a­tive.

The asym­met­ri­cal re­sponse of the world’s two largest economies to their re­spec­tive sav­ing dilem­mas has far-reach­ing con­se­quences. To the ex­tent that China makes progress on the road to con­sumer-led re­bal­anc­ing, it will shift from sur­plus sav­ing to sav­ing ab­sorp­tion. Al­ready, China’s gross na­tional sav­ing rate has de­clined from a peak of 52 per­cent of GDP in 2008 to around 44 per­cent this year. It should fall fur­ther in the years ahead.

The US, long locked in a code­pen­dent eco­nomic re­la­tion­ship with China, can­not af­ford to ig­nore this shift. Af­ter all, along with re­duced cur­rent-ac­count and trade sur­pluses, China’s con­sumer-led shift to sav­ing ab­sorp­tion likely en­tails di­min­ished ac­cu­mu­la­tion of for­eign-ex­change re­serves and re­duced recycling of those re­serves into dol­lar-based as­sets such as US Trea­suries.

To the ex­tent that Amer­ica fails to boost its do­mes­tic sav­ing, the lack of Chi­nese cap­i­tal may well force the US to pay a steeper price for ex­ter­nal fi­nanc­ing, through a weaker dol­lar, higher real in­ter­est rates, or both. Such are the clas­sic pit­falls of code­pen­dency: when one part­ner al­ters the re­la­tion­ship, there are con­se­quences for the other. No coun­try can pros­per in­def­i­nitely with­out sav­ing. Hold­ing the world’s re­serve cur­rency, the US has got­ten away with it, largely be­cause the rest of the world let it. Af­ter all, the en­ablers – es­pe­cially ex­port-led economies like China, along with its re­source-de­pen­dent sup­ply chain – ben­e­fited from the US’ con­sump­tion binge, as it drove an out­size ex­pan­sion of global trade.

But those days are num­bered. US vot­ers – es­pe­cially dis­en­fran­chised, an­gry mid­dle-class work­ers – in­creas­ingly rec­og­nize that some­thing does not add up. Yet US politi­cians con­tinue to de­flect the elec­torate’s anger out­ward, dis­miss­ing the growth sub­sidy that ac­com­pa­nies the “kind­ness of strangers”. It is time for politi­cians to own up to the un­com­fort­able truth: The sav­ing deficit is the sin­gle great­est threat to the Amer­i­can dream.

Stephen S. Roach, a fac­ulty mem­ber at Yale Univer­sity and for­mer chair­man ofMor­gan Stan­ley Asia, is the au­thor of Un­bal­anced: The Code­pen­dency of Amer­ica and China. Project Syn­di­cate, 2016. – will

pub­lish an English edi­tion of ChinaWatch pub­li­ca­tion once a month. The first edi­tion was pub­lished on Fri­day, draw­ing fa­vor­able re­sponses from Aus­tralian read­ers on both the con­tent and the model of co­op­er­a­tion.

As for the two me­dia out­lets, the co­op­er­a­tion will cre­ate a win-win sit­u­a­tion for them: On the one hand, China Daily will be able to reach a wider read­er­ship in Aus­tralia. On the other hand, the ChinaWatch pub­li­ca­tion, which caters to Aus­tralian read­ers’ grow­ing in­ter­est to learn more about China, will help en­rich the Aus­tralian news­pa­pers’ con­tent and in­crease their di­ver­sity, which, in turn, will make them more ap­peal­ing to read­ers.

Yet, for me, the most sig­nif­i­cant part of the co­op­er­a­tion is the two me­dia out­lets’ courage and ef­forts to blaze a new­trail in forg­ing a closer work­ing re­la­tion­ship be­tween them.

Ob­vi­ously, me­dia or­ga­ni­za­tions in China and Aus­tralia dif­fer from each other in cul­tural and po­lit­i­cal back­grounds, me­dia phi­los­o­phy, me­dia own­er­ship and even in the role each as­sumes in their re­spec­tive so­ci­ety.

These dif­fer­ences used to form a big bar­rier for me­dia or­ga­ni­za­tions on both sides and im­pacted hugely on their cov­er­age on each other’s coun­try. Aus­tralian me­dia, as part of theWestern me­dia world, have of­ten har­bored a bias against de­vel­op­ing coun­tries, China in­cluded, and such a bias can­not pos­si­bly con­trib­ute to bet­ter un­der­stand­ing be­tweenWestern coun­tries and China.

In this con­text, the newa­gree­ments that sig­nal wider and closer co­op­er­a­tion be­tween me­dia out­lets in China and Aus­tralia can help mit­i­gate the neg­a­tive ef­fects of their me­dia dif­fer­ences and deepen mu­tual un­der­stand­ing be­tween the two coun­tries.

Chi­nese and Aus­tralian me­dia­may dif­fer in many­ways, but they also share in­creas­ing com­mon­ground, and they both need to present their coun­tries to the world and vice versa, es­pe­cially as glob­al­iza­tion and new­me­dia have turned the world into a global vil­lage.

Hence, shar­ing con­tent, launch­ing joint me­dia prod­ucts and con­duct­ing jour­nal­ist ex­changes, as shown in the latest ef­forts in China-Aus­tralia me­dia co­op­er­a­tion, will en­able me­dia on both sides to bet­ter play their role as a bridge that helps en­hance un­der­stand­ing and friend­ship among the two peo­ples.

In re­cent years, peo­ple in both coun­tries have viewed each other’s coun­try in a more pos­i­tive way, with a num­ber of opin­ion polls in Aus­tralia show­ing more Australians now at­tach greater im­por­tance to Aus­tralia-China ties. For ex­am­ple, the 2015 Lowy In­sti­tute Poll, re­leased in June last year, found that most Australians see China as “more of an eco­nomic part­ner to Aus­tralia” than a “mil­i­tary threat”.

Given the me­dia’s strong role in shap­ing pub­lic opin­ions, that me­dia out­lets in Aus­tralia are will­ing to cover China and Aus­tralia-China ties in a more com­pre­hen­sive and ob­jec­tive man­ner should only fur­ther strengthen this per­cep­tion.

Such a fa­vor­able mo­men­tum needs to be main­tained as it helps fos­ter a cor­dial at­mos­phere for re­cip­ro­cal in­ter­ac­tion be­tween China and Aus­tralia, which is in the in­ter­ests of both coun­tries. Need­less to say, me­dia or­ga­ni­za­tions on both sides, such as the China Daily and Fair­fax­Me­dia, can play an im­por­tant role in this.


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