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Solving Global Economic Imbalances with China

Domestic measures to rein in the U.S. budget deficit are, of course, another critical piece of the puzzle.

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The Obama administration should also take the international route to resolve global economic imbalances. To complement the bilateral discussion of exchange rates at the S&ED, the United States should continue to raise the currency issue in forums such as the G-20 and IMF where other states, including both developed countries such as France and developing countries such as Mexico and Indonesia, can also register their objections to China’s undervalued currency. Equally important to more balanced growth is encouraging China to continue to boost domestic consumption through social programs such as  universal health care. At the S&ED, Treasury officials have noted, they will discuss the fact that the American consumer is not going to play the role it once did as the major demand engine of the world economy. Domestic measures to rein in the U.S. budget deficit are, of course, another critical piece of the puzzle.

On the bilateral front, market access issues will become an increasing irritant in the relationship if not addressed. In particular, the United States must be clear that it objects to policies such as China’s “indigenous innovation” program, which uses China’s market power to force foreign companies to license their latest technology. This and other policies aimed at creating “national champions” are quickly eroding political support for China among U.S. multinational corporations. These are the powerful voices that typically weigh in to stabilize relations and counsel against the imposition of trade sanctions. Beijing needs to realize that the effects of its market restrictions alongside accusations of cyberespionage and continuing concern on exchange rates are combining to create a particularly unfavorable environment for China on Capitol Hill.

On the flip side, the Obama administration should focus some energy in finding ways that—under appropriate guidelines—Chinese direct investment in the United States, which totaled $5 billion last year, continues to create good American jobs.

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