PIIE Blog | China Economic Watch
The Peterson Institute for International Economics is a private, nonprofit, nonpartisan
research institution devoted to the study of international economic policy. More › ›
Subscribe to China Economic Watch Search
China Economic Watch

The Sunnylands Summit: Power for Purpose

by | June 5th, 2013 | 04:17 pm
|

When Presidents Obama and Xi Jinping meet for a historic private summit this week, the California desert air will be rife with the rhetoric of cooperation and partnership. The reality is  that the two countries are engaged in indirect economic skirmishing that could slowly corrode the rules-based multilateral economic system, embodied in the International Monetary Fund (IMF), World Bank, and the World Trade Organization (WTO).

The way forward (explained in greater detail in this Policy Brief) is for the two countries to strike a power-for-purpose grand bargain: The United States would give up power in these institutions in return for China taking on greater global leadership to preserve the system’s real purpose. But first they will have to overcome narratives of mutual distrust.

China has been the biggest beneficiary of the open global economic system. Nevertheless China resents the fact that its rules have been shaped (sometimes rigged) by the United States. The United States, for example, has not ratified changes in the voting arrangements in the IMF that would give emerging markets such as China more say. For similar reasons, Washington has been reluctant to face an increase in the lending capacity of the World Bank. As a result, and with a view to exercising its newfound power, China is creating parallel economic structures: the BRICS (Brazil, Russia, India, China, and South Africa) bank to rival the World Bank and regional trade initiatives such as the Regional Comprehensive Economic Partnership to parry American forays into Asia.

For the United States, distrust stems from China’s military ambitions and cyber warfare and espionage. On the economic front, it stems from China’s mercantilist exchange rate policy, closed financial and exchange system, tolerance of intellectual property violations, and continued prevalence of state capitalism. In the American view, China takes advantage of the openness of others while remaining relatively closed itself, a combination that is inconsistent with global leadership. This perception has led the United States to pursue initiatives such as the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). These aim to pursue trade liberalization but it cannot be denied that they have the effect, if not the purpose, of discriminating against China, and hence pressuring it to respond.

What would be some key elements of the power-for-purpose deal? The United States should work to increase the power and influence of China in multilateral financial institutions, such as the IMF and the World Bank, to parity with that of the United States and Europe. The United States, and especially an indebted Europe, can no longer have veto power in these institutions. But if they do have veto power, so too should China. The United States should also work toward actively promoting the rise of the renminbi as an international reserve currency. Providing China is forthcoming, the United States should forego discriminatory initiatives such as the TPP and TTIP in favor of a new WTO-based trade liberalization initiative.

By way of contributing to sustaining the open economic system, China should offer to substantially increase the size of the IMF to provide greater collective insurance against global shocks. It should work toward a new multilateral round of trade negotiations (a China Round) in which it would constructively engage in opening its markets in return for partners addressing some of China’s concerns. This would only be credible if China were willing to take actions at home to open its financial and exchange markets and roll back state capitalism.

Why should the United States be willing to cede power? If China were more empowered in existing multilateral structures, it would have a greater incentive to preserve them. For example, if the renminbi were to become a reserve currency, China would be more reluctant to jeopardize that status by closing its markets to foreigners or expropriating property. If it has more say in the World Bank, it would be less inclined to pursue the BRICS bank. Multilateralism could help constrain China by defining norms of legitimate behavior. Such soft power is one of the last few weapons in the depleting arsenal of influence over China.

Why should China be willing to take on additional responsibilities when it has pressing development challenges at home? Broadly: because the two are consistent. For example, China’s rebalancing strategy—embraced in principle by Chinese policymakers—requires a new bout of liberalization with reform of state enterprises and opening of financial markets. This is also what outsiders want and an open trading system needs. Similarly, by contributing to a stronger IMF, China would be taking out insurance against global financial instability that would eventually be very costly for its own export-dependent economy.

The United States bequeathed an open rules-based multilateralism economic system after World War II even though as a hegemon it did not really need it. The irony is that, at a time of decline, the United States needs that system as the best defense against a resurgent China. The further irony is that preserving that system will require the United States not to reassert the vestiges of its diminishing power to contain China but to relinquish power in favor of its rival-in-waiting. Or, as Edmund Burke might have said, the United States may have to graciously give up the power that it is increasingly unable to exercise.