- With US President Joe Biden’s Build Back Better programme and Beijing’s dual circulation strategy, both countries are looking inward to boost economic growth. But without both countries working in concert, the recovery risks exacerbating global imbalances
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Chinese staffers adjust US and Chinese flags before the opening session of US-China trade negotiations in Beijing in 2019. Photo: Reuters |
The US and China are both doing great things to boost their economies, with grand designs to deliver faster homespun growth in the wake of the pandemic.
US President Joe Biden’s Build Back Better programme and Beijing’s dual circulation strategy are both aimed at putting extra juice into domestic recovery, and it’s a matter of conjecture which will do a better job of kick-starting sustainable global growth over the future.
China may be the manufacturing epicentre of the world but the United States is arguably the main powerhouse for the global economy. However, being the swing producer for global growth has its costs, not least the jaw-dropping size of America’s twin budget and trade deficits which threaten to spin further out of control.
Biden may be aiming to rein these in over the future, but are the goals of stronger US growth and stabilising the world’s growing imbalances a bridge too far and possibly mutually exclusive ideals?
The US and China may be looking inward for answers but the solution lies in improved trade relations and better cooperation ahead.
The US and China both have a lot to give to the world on the recovery trail, but will it be more of the same over the future, with the US bouncing back to stronger growth with wider deficits, overtaken by China expanding at roughly twice the pace and raking in the rewards of a booming export surplus?
Right now, it’s hard to judge where both economies are coming back to land after the sharp lift-offs from the post-pandemic lows last year.
Over the second quarter, China’s economy expanded by 1.3 per cent over the previous quarter, growing at a 5.2 per cent annualised rate, but below the 1.6 per cent quarterly pace notched up by the US, which was 6.4 per cent on an annualised basis.
Ironically, both economies were overtaken by the usually lacklustre Europe, which showed a faster 2 per cent quarter-on-quarter rebound (8 per cent annualised) in the second quarter.
The odds are that once the pace of economic expansion normalises and the volatility is smoothed out, China’s growth rate should settle down closer to trend around 6 per cent per annum, while US economic growth should moderate towards longer-term output potential of around 3 per cent.
The US is already enjoying a faster consumer-led recovery, thanks to the US$1.9 trillion recovery programme, which has provided a huge lift to consumer confidence. With consumer spending accounting for up to 80 per cent of US economic demand, it’s hard to envisage Biden trying to fire up other parts of the economy.
A capital-intensive, investment-led boom is unlikely, considering the government’s aim to raise business taxes.
The problem for US policymakers is that every time stimulus spigots are opened up, economic potential leaks abroad to overseas producers and especially China. There is a clear linkage between bigger US budget shortfalls feeding into wider trade gaps and ending up with bigger trade deficits with China.
Biden would dearly love to change this relationship but it’s going to take a long time and a considerable amount of domestic investment in the US’s productive capacity, to reverse decades of the policy of benign neglect and economic stagnation, especially in rust belt industries. Years of the strong dollar, globalisation and capital flight overseas have left the US economy badly scarred.
It may be relatively easier to marshal economic regeneration in a mixed, centrally-planned economy like China’s but it would be a much tougher task in a market economy like America’s. China is making the switch to domestic-led growth under its dual-circulation drive but will still be lapping up the US’s excess domestic demand in the meantime.
The US-China trade deficit is already running at a US$338 billion annualised rate and should soon be trending upwards of US$400 billion again, as it was just before the US-China trade war escalated in 2018.
Policy-wise, there is no turning back. The US must stay committed to pumping up the recovery, keeping monetary and fiscal policy as super-loose as possible. China needs to keep the world supplied with consumer and investment goods to keep global recovery going as fast as it can.
It’s a symbiotic relationship with both countries playing central roles in the recovery process. How much better would it be if the US-China trade war could end soon.
David Brown is the chief executive of New View Economics
