China's stiff upper hand
The idea of "rebalancing" the world economy is simple. Before the financial crisis, some advanced countries (led by the United States) were overspending, and some poorer countries (led by China) were oversaving. The two offset each other. The big spenders ran large trade deficits, and the big savers ran large trade surpluses. Now, the financial crisis has dampened the overspending. If the big savers don't increase their spending, the world economy faces prolonged slow growth. Countries may battle each other for shares of that weak demand by managing exchange rates, subsidies or tariffs.</br></br>This is a formula for economic strife, whether called "currency wars," protectionism or economic nationalism. As wealthy countries wrestle with stubborn unemployment (9.6 percent in the United States, 10.1 percent in France, 20.5 percent in Spain), it will become harder to resist policies that favor local businesses and workers, especially if other countries are doing the same. Avoiding this future is the central issue facing leaders of the Group of 20 economies when they meet this week in Seoul.</br></br>The world's second-largest economy has run blatantly mercantilist (that is, discriminatory) economic policies for years. The resulting huge trade surpluses boosted job growth and, while much of the world boomed, they were tolerated. In 2007, China's current account surplus (mainly trade) reached 11 percent of its economy (gross domestic product). But as China has moved up the value chain - from toys to telecommunications equipment - and as the world economy weakened, its surpluses have become more threatening to more countries.</br></br>Like Japan before it, China embraced an investment-led and export-led economic model, explains economist Eswar Prasad of Cornell University. Manufacturers receive subsidized land and energy; the exchange rate of the renminbi is controlled and kept depressed, making Chinese exports more competitive on world markets and making imports into China more expensive. Bank lending rates, regulated by government, are also kept low so that companies can borrow cheaply.</br></br>The result has been rapid, though lopsided, industrialization. Economic growth has averaged about 10 percent annually for several decades. In modernizing, China shut down or streamlined many inefficient state-owned enterprises; the job loss was substantial, 43 million from 1997 to 2004, says the World Bank. One appeal of new export-oriented companies was to replace those jobs.