Stephen Roach worries
Source Louis Proyect
Date 06/03/26/23:36

MY TRAVEL SCHEDULE IS planned months in advance. It was only by
happenstance that I found myself in both Beijing and Dubai this past week
-- two of the more recent flashpoints in a US-led pushback against
globalization. What I found in both cities unsettled me -- disappointment
and frustration over America's attitude toward two of its major providers
of foreign capital. The United States has been having a good deal of
trouble with its overseas image in recent years. The feedback from Beijing
and Dubai is that this image is going rapidly from bad to worse --
something a saving-short US economy can ill afford.

China is deeply troubled over the outright hostility from an increasingly
xenophobic US Congress. The senior officials I spoke with this week in
Beijing protested on two counts -- China's fragility and America's penchant
for scapegoating (see my 21 March dispatch, "Inside the China Debate"). On
the first count, the Chinese don't believe that US politicians appreciate
the potential risks that still lurk in this transitional economy. Instead,
they are pressuring China as if it were operating from a position of much
greater strength. China remains very much a tale of two economies -- a
booming coastal region and a lagging interior. Most in Washington view
China from the lenses of Beijing and Shanghai, and conclude that these two
thriving metropolises personify the emergence of a powerful and mighty
nation. What they don't realize is that only 100 km away from either city
lurks a China that has changed very little in the past thousand
years. Yes, 560 million Chinese now live in urban centers around the
country, although probably less than half these city dwellers have seen
meaningful improvement in their standard of living over the past 30
years. Meanwhile, the rural population of some 745 million Chinese still
tries to get by on $1-2 per day.

At the same time, despite 25 years of 9.5% real GDP growth, serious
vulnerabilities continue to plague the macro structure of the Chinese
economy. The financial system has only just begun the long march toward
liberalization and development. Growth continues to draw the bulk of its
support from external demand (i.e., exports) and autonomous internal demand
(fixed asset investment). Self-sustaining growth from the Chinese consumer
is deficient, reflecting a pervasive sense of job and income insecurity
that stems from ongoing reform-induced headcount reductions. Far from
letting the invisible hand of market-based capitalism drive price-setting,
the visible hand of administrative fiat still plays a major role in the
determination of prices of goods and services in the real economy, as well
as interest rates, the currency, and the prices of many other assets in the
financial economy. All this speaks of a Chinese strain of market-based
socialism that is still far too fragile to stand on its own.

China also feels that it is being victimized for America's structural
problems. Premier Wen Jiabao was crystal clear on that point when he ended
the recent China Development Forum by stating, "It is unfair to make China
a scapegoat for structural problems facing the US economy." There's no
dark secret what he was referring to -- China's important role as a
provider of goods and financial capital to a saving-short US economy. As
long as America has a serious saving problem -- and, of course, the US net
national saving rate plunged into negative territory for the first time in
history in late 2005 -- trade deficits are a given in order to attract the
foreign capital to fill the void. If the Schumer-Graham bill closes down
US trade with China through the imposition of steep tariffs, a saving-short
US economy will simply have to divert a significant portion of its
multilateral trade deficit elsewhere. Undoubtedly, that means a
higher-cost producer would have to take China's place as a low-cost
provider of capital to the US -- imposing the functional equivalent of a
tax hike on the American consumer.

When I pointed this out to Senators Graham, Coburn, and Schumer in Beijing,
Senator Schumer said, "I understand the structural point, but China still
has to give." The editorialist in me says, if Washington -- or for that
matter, beleaguered US manufacturers -- really wants China to give, then it
needs to make that argument from a position of a macro strength and boost
America's national saving rate. Until, or unless, that happens, US-led
China bashing is nothing short of political hypocrisy. In the meantime,
Washington could well be about to compound one of America's most serious
structural problems -- at considerable expense both to the US and Chinese
economies. These are the "lose-lose" outcomes of globalization that can
only end in tears.

In Dubai, I was met by a similar sense of consternation. Fresh from the
wounds of the rejected Dubai Ports World transaction, several major private
equity investors in the UAE were blunt in expressing their sudden loss of
appetite for US assets. As one seasoned investor in US companies and
properties put it to me, "As practitioners, as investors, we have become
very shy of the US -- we just turned down a recent deal for that very
reason." Another added, "For us, foreign direct investment into the US has
become far less palatable due to recent developments. The bulk of our
dedicated offshore money is now going elsewhere." The comment that
unnerved me the most took this exasperation to an even deeper level. One
investor asked, "What can we do to push back, to send a signal?"

I certainly don't want to make too much out of an unscientific survey of a
few private equity investors in Dubai. But up until recently, this was one
of the Middle East's most pro-American investment communities. The
individuals I met with this week are seasoned participants of many a
cross-border transaction into the US. For them, the political shock wave
from Washington has come from out of the blue, and they now see little
reason to go back to the same well -- especially given the wide menu of
less contentious alternatives available elsewhere in the world. In the
broad scheme of things, Dubai is a small player in the world of
international finance. But to the extent that the Dubai backlash is
emblematic of similar distaste from other Middle East investors -- hardly
idle conjecture, in my view -- the repercussion cannot be minimized. Net
foreign direct investment into the United States hit $128 billion in 2005
-- an increase of $22 billion from the inflows of 2004. If that trend now
starts to reverse course, America's already daunting current-account
financing problem will only get worse.

From Beijing to Dubai, there is a growing undercurrent of economic
anti-Americanism. The irony of it all is truly extraordinary: The US has
the greatest external deficit in the history of the world, and is now
sending increasingly negative signals to two of its most generous providers
of foreign capital -- China and the Middle East. The United States has
been extraordinarily lucky to finance its massive current account deficit
on extremely attractive terms. If its lenders now start to push back,
those terms could change quickly -- with adverse consequences for the
dollar, real long-term US interest rates, and overly indebted American
consumers. The slope is getting slipperier, and Washington could care less.

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