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4 juin 2007

The Clash of Prosperity: the US vs. China

The protectionist mood that weighs on the American campaign has Democratic candidates hitting at free trade and NAFTA, the North America Free Trade Agreement negotiated by GHW Bush and inked by Bill Clinton.

The rust belt is suffering from global competition and more still from technological innovation and the productivity gains that go with it, as Fed Chairman Ben Bernanke points out. Growing social discontent leads candidates to take stances running against their own convictions, claiming that America should better protect itself and renegotiate trade deals.

John McCain does not bother with such declaring himself in favor of free trade, the bedrock of US foreign economic policy since WWII.

Let’s forget the campaign trail for a moment and look into US-China economic relations.

The economy will be a key issue in the debate, bringing forward the concerns of the middle-class about foreign competition, outsourcing and the resulting job losses.
However one question is worth asking: how serious is the Chinese economic threat on the long run? Is America’s capacity to respond to a changing environment? Is the American economy unable to adapt, US industry unable to modernize, US labor unable to maintain their know-how edge, all at the price of job reconversion?

You should read the article below, published in 2007 in the Wall Street Journal. It sheds an interesting light to what I call the clash of prosperity between the US and China. See below.

The shortcomings of China’s economic transition shall not be underestimated, from training to the imbalances of the financial system. Not that the economic emergence of China and its impact on the industrial economies are to be called into question, but the clash of prosperity it generates may not be so devastating. It is sometimes said to signal the end of the rich countries. Interdependence is the name of the game.

The goal of the SED, Strategic Economic Dialogue led by Treasury Secretary Hank Paulson, is to allay tensions between China and the US, particularly on currency and IPR issues. SED results are mitigated as they confront Chinese priorities of domestic order and social peace. A disruption in China’s transformation into a market economy would be disastrous, and so the key question is to manage the interdependence has resulted.

I do not believe in the fading away of America’s economic strength.
In the US as in other industrial economies, social safety nets represent a major issue for the future. However China’s economic imbalances, adaptation to the emergence of Asia’s economies, and the size of the US market should allay fears of an unstoppable disindustrialization in the US.

How will the campaign address these issues? What will McCain and Obama say about the clash of prosperity between China and America?

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