What About the Trade Imbalance, Indeed

Is China growing at the United States’ expense? That is one of the most vexing questions about China for U.S. politicians, and that’s the question Stephen Roach of Morgan Stanley and Desmond Lachman of the American Enterprise Institute are at work debating on cfr.org.

Short answer? Well, they’re not giving a short answer. In Roach’s opening argument, “Don’t Scapegoat China,” he argues that the United States needs to get its house in order before it can blame China. He says the culprit, by in large, is “a dearth of domestic saving” in the United States. “Lacking in domestic saving, the United States must import surplus saving from abroad in order to grow—and run massive current-account and foreign trade deficits to attract the capital,” Roach writes.

Lachman comes back with an indictment of China’s undervalued currency. The United States should save more, he agrees, but “it will also need a much cheaper dollar to promote its exports and to discourage its imports.” And China will have to let its currency reflect market value for that to happen. So in addition to better U.S. policy, Lachman says China will have to undergo currency reform for the good of everyone.

Roach counters that Lachman’s opinion reflects the Washington Consensus (which is more or less the idea of neoliberal reform), which he summarizes thus: “Sure, we in America need to fix our deficits—and maybe some day we will—but China needs to get its act together now.”

A small wrench landed in their civil debate today. Without specific reference to the currency issue, the Chinese Commerce Ministry has said it will attempt to eliminate China’s trade surplus in the next four years.

Until 2010, the world’s fourth-largest economy will target 10 percent annual growth in foreign trade, down from 24 percent growth in the first half of the decade, the commerce ministry said in a statement on its website Wednesday.

In the next four years, China will target a new foreign trade strategy where exporters abandon the blind pursuit of growth for growth’s own sake in favor of “quality growth,” the ministry said.

My question for those with a better understanding of economics is: How will this policy, if executed as advertised, affect the feasibility of revaluing the currency?

Is the Nuclear Unity Hiding Ongoing Friction?

Dozens of reporters are working the North Korean nuclear test story. Dozens more, some on double duty, are covering Abe Shinzo’s tour through China and South Korea. I won’t try to duplicate or aggregate their work, but some of the key links appear at right in my Google Reader feed.

But there’s something going on behind the headlines that we shouldn’t overlook. Some commentators are hailing the current “fence-mending” tour and the region’s unanimity against North Korea’s actions as a sign of a new era in Japan’s relations with its neighbors. Maybe, but the jury is still out on the Abe administration.

When pressed by an opposition politician, Abe said he would not change the Murayama Statement of 1995, in which Prime Minister Murayama Tomiichi expressed regret for Japan’s military actions during World War II on the occasion of the 50th anniversary of the war’s end. “I have no plans of creating a new statement that would rewrite what the 1995 statement said,” Abe said. “That statement was approved by the then Cabinet so it still lives on with my Cabinet.”

But just because Abe won’t redress the Murayama Statement doesn’t mean he won’t step on diplomatic toes. What’s certain is that he is being careful not to cross China and South Korea early on. During Abe’s visit to China, Hu Jintao raised Yasukuni then said obliquely, “I hope you will work to remove political obstacles.” Far from resolutely conciliatory, this statement echoes statements by Hu and others in the Chinese government during the Koizumi era, when phrases like “responsible view of history” were code, meaning, “Don’t go to Yasukuni, Jun!”

But the visit did go smoothly, and the leaders’ agreement that a North Korean nuclear test would be “unacceptable” dominated the agenda. Since the nuclear test apparently occurred while Abe was in the air on the way to South Korea, the nuclear issue—and the corresponding unanimity—promises to dominate Abe’s time there. There is little potential for the emergence of Japan–Asia disputes on this trip, but that doesn’t mean it’s clear sailing forever.
Asahi Shimbun notes that Abe has a history of differing statements on the Murayama Statement and another political statement on the “comfort women” issue:

Abe previously had been similarly vague on his own views toward Murayama’s statement. In February, when Abe was still chief Cabinet secretary, he offered a different interpretation of Japan’s actions during World War II.

“There is also the issue of how to define a war of aggression,” Abe said at a Lower House Budget Committee session. “I think the situation is one in which no set definition has been decided on by scholars.”

Abe had taken a similar path regarding the [Chief Cabinet Secretary] Kono [Yohei] statement that acknowledged the involvement of the Imperial Japanese Army in the management of brothels for “comfort women.” The [1993] statement accompanied a report by the government on the “comfort women” issue.

In 1997, Abe joined a group of young Diet lawmakers that took issue with Japan’s history education.

At a session of the Lower House Audit Committee’s second sub-committee in May 1997, Abe criticized Kono’s statement as being based on false information.

On Thursday, Abe said his Cabinet will now inherit that statement.

Abe has already changed his historical interpretations to fit the political tides. It is therefore hard to predict what he will do in the future.

White House in Support of Abe's Asia Visits

The White House came out in support of strong ties among East Asian states yesterday, but emphasized Japan–South Korea ties more than better relations between Japan and China.

I read the reference to the United States’ “two key allies in East Asia, Japan and the ROK” as a way of emphasizing the continued distance between the United States and China. The statement could easily have been worded to emphasize strong ties between all three without introducing this element.

The full statement:

President Bush is encouraged by Japanese Prime Minister Shinzo Abe’s planned visit to the People’s Republic of China on October 8 and to the Republic of Korea (ROK) on October 9. The United States places utmost importance on close cooperation between its two key allies in East Asia, Japan and the ROK. Stronger bilateral ties enable closer trilateral U.S.-Japan-ROK cooperation, which only strengthens our mutual partnerships based on common values of democracy and freedom. Cooperation between Japan and China is also critical to dealing with the common challenges we face in Asia. Strong relations among these key nations in Asia can enrich the vibrant social and economic exchanges already taking place, and contribute to the region’s security.

The President supports the efforts of Prime Minister Abe and looks forward to continuing the strong relationship between the United States and Japan for the cause of peace, prosperity, and freedom in Asia and the world.

A Missed Opportunity in U.S. East Asia Policy

It is an imaginative exercise to read speculative accounts of Sino-Japanese relations from earlier in the Koizumi years. No one knew just how bad it would get in the public sphere, and I find that most writers at the time imagined the Koizumi administration and China’s new leadership under Hu Jintao beginning in 2002 would work it out better than they did.

Leave it to an empirical analysis to get a pretty good idea of what was going on. Ming Wan, writing in July 2003 in the Woodrow Wilson International Center for Scholars Asia Program Special Report [pdf], laid out a prescient assessment of the U.S. effect on Sino-Japanese relations and suggested the United States would be wise to work toward reduced China–Japan tensions.

We know what happened instead: Sino-Japanese diplomatic relations are at the height of dysfunction, and only now with Koizumi’s departure is there a feeling of hope, however muddled by Prime Minister Abe Shinzo’s support of Koizumi and the continued presence of the Koizumi’s inflammatory foreign minister Aso Taro.

Aside from his unheeded advice, Ming Wan presents some interesting statistical findings based on numerical measures of political, security, and economic ties. Among the findings in my notes after the jump:

He found statistically that: U.S–China cooperation has a strong positive correlation with U.S.–Japan ties but has no effect on the China–Japan relationship; “U.S.–Japan cooperation has a moderate negative correlation with China–Japan relations” and little impact on U.S.–China relations; and China–Japan cooperation does not have a significant effect on the two other bilaterals.

The essay is delightfully well-organized, so allow me to outline his points quickly

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