2012 Presidential Election: Chinese Perspective

As an international student from China, this is the first time I have watched a US presidential election campaign live as it unfolds. The election is interesting to many Harvard students as a competition between two Harvard alumni: Barack Obama (HLS) and Mitt Romney (HLS/HBS).

As a foreign student, I’m observing the US presidential election purely as an outsider, without any prior perceptions. Obviously it is a critical moment for the US as the recovery from the Great Recession is on the way, and not surprisingly the policy debate seems to center mostly on domestic issues: economic growth, unemployment, healthcare, entitlements, budgets, and so on. Yet the two policy issues that most Chinese are interested in are US foreign and trade policies with China and to a lesser extent, the significant government debt and large budget deficits.

Since former President Nixon visited China in 1972, the US-China relationship has experienced ups and downs, but few would deny that a constructive bilateral relationship has benefited both countries over the past 40 years. Currently the US is China’s second-largest trading partner (after the EU), and China is the third-largest trading partner for the US (after the EU and Canada).

Although the Obama Administration stated that it “welcomes a strong, prosperous and successful China that plays a greater role in world affairs,” China is deeply concerned about the strategic rebalancing towards Asia the US announced in 2011, and views the US’s increasing involvement in Asia a threat to its security. There has always been “mutual mistrust” between the two countries, partially owing to their very different political systems and economic models.

Recent US presidential campaign rhetoric has included very sharp language about China, focusing on whether China is unfairly disadvantaging U.S. companies and costing domestic job losses. Both campaigns issued ads promising to get tough on China on alleged Chinese trade violations.

For example, in the “Five Executive Orders for Day One,” Romney has promised to “sanction China for unfair trade practices,” including “listing China as a currency manipulator” and “assess countervailing duties”.  The fiery rhetoric prompted former U.S. Secretary of State Henry Kissinger to sharply criticize both presidential candidates for using “extremely deplorable” language and labeling China a cheat.

Getting tough with China and portraying it as public enemy number one is often a popular theme for politicians, especially in states with lots of manufacturing jobs. Although many campaign promises do not eventually materialize, the rising trend of protectionism is worrisome.

When an economy is in a difficult time, the natural tendency would be to erect more trade barriers across countries, and one perfect example is the collapse of world trade during the Great Depression of the 1930s. However, there can be no winners in a trade war between two major trade partners: when a party imposes a sanction on another party, the other party is bound to retaliate.

Even worse, sanctioning China would not help overall US current account deficits, which will always equal domestic savings minus investments – lower imports from China will simply be made up by higher imports from other countries, dollar for dollar.

The second issue is US government debt and significant budget deficits. As Bill Gross, Founder and Co-CIO of PIMCO wrote in his recent investment outlook, while the US currently has $16 trillion of outstanding debt, the future liabilities of Social Security, Medicare, and Medicaid would add another $60 trillion.

Consequently, the US needs to cut spending or raise taxes by 11% of GDP over the next five to ten years to keep a stable debt / GDP ratio, but the current scale of fiscal adjustments is far from that level. China holds about $1.1 trillion in US Treasury securities as of July 2012, and therefore the Chinese have voiced concern over the fiscal health of the US government on several occasions.

Ben Bernanke said in 2006 that “Reform of our unsustainable entitlement programs should be a priority”, yet in a democratic society such as the US, where entitlement beneficiaries have significant voting power, making the painful yet necessary reform is politically challenging.  Not surprisingly in the presidential debate, both candidates ruled out the possibility of cutting entitlements.

Secretary of State Hilary Clinton has described US-China relations as “uncharted territory”, as the US tries “to work with a rising power to foster its rise as an active contributor to global security, stability and prosperity while also sustaining and securing American leadership in a changing world.”

Whoever is elected, I believe the majority of people from both the US and China would love to see the two countries working together in a collaborative manner across a number of issues, such as responding to the financial crisis, climate change and nuclear non-proliferation.

This month marks the 50th anniversary of the Cuban Missile Crisis, a confrontation born of mistrust and a lack of communication that put the entire human race at the risk of extinction.

Today, the Cold War has long ended. Though China and the US have many different and even conflicting interests, as the largest two economies, both countries should seek to build trust via dialogue, and together make the world a better place for all of mankind.

October 21, 2012
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