Ever since crisis took hold of the global economy in the fall of 2008, China and the US have had to take a closer look at their relationship. It used to be a simple trade off: China manufactured products which it sold to the US and then effectively subsidized America’s consumers by purchasing US debt. The financial crisis brought all this to an end: China could no longer count on the US consumer to buy anything China’s factories put out. More importantly, credit woes convinced US consumers that they were living beyond their means and should cut back.
As the crisis deepened, with more Americans losing jobs, it has become apparent that the shape of the US economy has dramatically changed. At best, this looks like a jobless recovery. No longer can the US consumer be counted on as the engine of growth for the world economy, even though both China and the US would like this to happen. Instead, the Chinese government has talked about the Chinese consumer as being the force which will take up at least some of the slack created by the fall in Americans’ purchasing power.
It was against this backdrop that the US and China held their high-level trade talks in Hangzhou, before President Barack Obama’s trip to China in November. Even though both sides have done their best to paper over differences, there are some essential facts which remain:
• Globalization was based on open markets between nations
• Open markets can only grow when economic conditions are favorable
• Due to the contraction, China now views its own consumers as an asset for government and local Chinese producers, and won’t readily provide access to them by non-Chinese producers and marketers
When Chinese government officials talk about the dangers of protectionism, they are talking about Western countries not providing market access to Chinese exporters; they are not talking about China’s reluctance to open up its markets to foreign competitors. But it’s a two-way street. As the new economic reality sinks in, China can expect to be found to be in violation of more WTO rulings.
In simple terms, conditions have changed drastically, forcing both sides to re-evaluate the fundamental terms of the relationship because neither side prepared for or expected this to happen. Gradually, economic and trade policy will need to adjust to this new reality. And when the new reality sinks in, the relationship is likely to become even bumpier.
Paul Denlinger is principal of China Business Strategy, a consultancy, and has been working in Greater China since 1980.