China And America: Partners In African Entrepreneurship

In searching for ways to ameliorate the economic tension between the US and China over the RMB’s valuation, a unique entrepreneurial partnership involving Africa is offered as a possible resolution. ith the attention of U.S. policy-makers divided between the protracted battles against Islamic terrorists in Iraq and political scandals at home, global economic issues until recently, particularly with China, seemed to have taken a backseat. As a result of a new initiative by Treasury Secretary Henry Paulson, two high-level ―Strategic Economic Dialogues‖ over the last year (based on semi-annual meeting commitments from a September 2006 agreement between President Bush and Chinese President Hu Jintao) have centered on the ever-increasing economic ties between the two countries. And not surprisingly given the tension now in US-China economic relations, the main focus has been on the valuation of the Chinese RMB (Yuan), and in particular on how to reduce America‘s swelling trade deficits with China. Good thing, too, as the U.S. has to fund millions of dollars a day in debt service alone with China, leaving some people to think that the Chinese leaders meeting with American officials recently should have dressed in green qi paos, symbolic of landlord dominance in the pre-revolutionary era of China's past. Doubtless, China‘s emergence on the world stage will only lead to more intense competition and conflict unless U.S. policy-makers can find a strategy for cooperation. Maybe they should look to Africa, and begin to think of new paradigms of investment aid, based on privately-led, market entrepreneurism -one field where Americans have led the world and for which China and America can be pragmatic partners in a new dynamic form of globalization. ―Opportunity cost‖ is defined as lost choices we could have made to use resources in other ways. While America is engaged in debating many issues of global leadership militarily and otherwise, what is not being discussed in Congress, over the airwaves, or across dinner tables are the monies and influence that weren't expended, but could have been, for different purposes and in different places in the world. Among America‘s many global obligations is its commitment to honor the U.N. Millennium Development Goals to halve global poverty by 2015. Presently, the U.S. provides only 0.17 percent of its GDP in foreign aid to the developing world, which is far behind its promise of 0.70 percent and next-to-last place among developed countries. Obviously, under current trends America will not meet this obligation in the next nine years amid huge fiscal deficits (projected to total well over $2 trillion under even the rosiest assessments of the Bush Administration through fiscal year 2009, after inheriting a $128 billion surplus in fiscal year 2001 from the Clinton Administration) and a trade deficit growing and breaking new records every year. (Almost a third of the 2006 U.S. $763 billion trade deficit was with China alone; in fact, almost $500,000 of net outflow in trade from the U.S. to China occurs every minute of every day, on the average, or $30 million an hour). Foreign entities already own half of America‘s $8.7 trillion national debt. In November of 2006, China acknowledged what many international trade economists had calculated; they have attained over $1 trillion in foreign currency reserves (estimates are that 70% of their holdings are in U.S. dollar-denominated notes, with over $340 billion in T-Bills alone), surpassing Japan as the country with the most foreign-controlled U.S dollar reserves. By the May 2007 Strategic Economic Dialogue hosted by the US, China‘s reserves had reached $1.2 trillion. One knee-jerk response from Congress has been to threaten a 27.5 percent tariff (based on a bill in the Senate by Senators Schumer and Graham) on all Chinese imports coming into the U.S. to penalize Beijing for undervaluing its currency. That threat continues to raise its hoary head with the new shift in Congressional power back to the W International Business & Economics Research Journal – February 2008 Volume 7, Number 2 110 Democrats, they may be even more demanding on the Chinese in resolving trade and currency imbalances – and the message is clear -―either revalue the RMB or this tariff will be slapped on all imports from China‖. Even under the Republicans, Congress gave Beijing a window of time to show progress in alleviating this problem, by, showing some means of revaluing its currency. Perhaps in partial response to the rising tide of animosity on this issue, The People‘s Bank of China (China‘s central bank) recently allowed the renminbi to trade within a wider band; in July of 2005, the band was allowed to vary from 0.3%/day while in May of 2007, the band widened to allow trading of up to 0.5%/day – all subject to Beijing‘s central bank‘s discretion, of course. (The RMB has appreciated approximately 8% since the 2005 announcement.) The People‘s Bank of China at the time of the 2005 revaluation policy also stated that exchange-rate appreciation could ―play a role in addressing international payments imbalances‖ to help cool off China‘s overheated economy. The US Department of Treasury in June of 2007 announced that China‘s currency is undervalued, but did not go as far as declaring China a ―currency manipulator‖, however. Congress, though, is in the mood to confront and blame China with almost twenty bills offered to punish China for its supposed role in causing America‘s trade deficit. Yet, the plain truth is that unless America changes its own macro-economics, very little will be done to satisfy Congressional, labor, and business trade protectionist hawks. Without a doubt China holds a huge share of America‘s global trade deficit because of trade displacement, and that trade displacement is mostly throughout Asia, though. There is very little overlap between what little America manufactures (only 11% of the US economy is in manufacturing these days) and what China exports. If China‘s exports became more expensive, the US would simply switch to buying those products from other foreign companies and sources; there would be no net reduction in our global deficit, just a redistribution of it to other countries. The only way to fix that is to convince Americans to spend less and save more since China and other foreign countries are only selling what Americans want to buy in the quantities Americans demand. America‘s negative savings rate is the culprit according to many ITF the Chinese central bank officials will allow it to appreciate slowly, at their own designated pace without marching to any other country‘s demands. Moreover, many world leaders think it would be foolish now for either the U.S. or China to aggravate the somewhat tenuous relationship between the twin engines of global economic growth. Instead, what seems to be occurring is a downward spiral of animosity and misunderstanding, leading to a potential trade war. This is where Africa can provide common cause to alleviate this geo-political conundrum.