Center for Financial Markets and Policy Conducts Capitol Hill Briefing

January 04, 2012

The Center for Financial Markets and Policy at Georgetown’s McDonough School Business and the Milken Institute’s Center for Financial Markets hosted a Capitol Hill Briefing Nov. 15, 2011, on the impact of China and India on the U.S. and global economies.

The briefing featured Stanley Nollen, professor of international business at the McDonough School of Business, and Marc L. Busch, Karl F. Landegger Professor of International Business Diplomacy at Georgetown’s Edmund A. Walsh School of Foreign Service. Bradley Belt, senior managing director of the Milken Institute, moderated the panel, and Reena Aggarwal, professor of business administration and finance at the McDonough School of Business, introduced it.

The panelists largely focused on the increasing role China and India play in the global economy, but noted that, especially in regard to China, there are ample opportunities for even greater constructive involvement. More specifically, the panelists discussed the impact of inward and outward foreign direct investment, Asia’s potential role with respect to the Eurozone crisis, the severity of China’s alleged currency manipulation, and rebalancing the global economy. 

The panelists agreed that foreign direct investment in India and China, both inward and outward, has a net positive effect on the U.S. economy. Nollen noted that China is now the second largest recipient of FDI inflows in the world and that India has experienced a significant increase in FDI inflows in the last five years. He argued that American firms will take advantage of investment opportunities in China and India, thereby enjoying the benefits of rapidly growing markets and access to cheaper goods that can be imported to the United States.

Although this foreign investment might reduce the number of jobs in investor countries, Nollen added that counterbalancing FDI from Chinese and Indian firms into the United States creates domestic jobs and mitigates the job losses stemming from FDI outflows. Busch warned, however, that given the pressure China is facing on alleged currency manipulation, it is enacting protectionist measures to close certain sectors of its economy to foreign investment. He added that these protectionist moves could compound prevailing American sentiment that trade with China is neither beneficial nor fair for the United States.

In regard to China’s potential role in the ongoing Eurozone crisis, Nollen highlighted China’s vulnerability to the effects of the crisis given that the value of its exports to the EU was larger than of those to the United States. However, Aggarwal stated that China already has announced that it does not plan to assist the Eurozone, at least until an economically viable long-term plan for Europe is on the table.

In addition, there was discussion of the value of the Renminbi and its artificial devaluation. Nollen suggested that while the Yuan is undervalued, it is not by much. Busch, on the other hand, thought that China was devaluing its currency by approximately 20 percent.  He ruled out, however, a number of ways to correct for this:  the United States cannot countervail Chinese exports because, he said, it would violate WTO regulations; the United States can label China a currency manipulator, but this legislative trigger could start a trade war with China; and diplomatic pressure could be effective, but legally problematic given the lack of a binding international currency regulatory regime. Instead, Busch suggested that the United States devise antidumping measures to counteract predatory Chinese exports. The effect of dumping practices can be measured by comparing the price of exports against a control proxy economy’s export prices.

The panelists discussed the structural trade imbalance between the United States, with its consumption-driven economy, and China, with its high-saving export-driven model. Belt noted that the engine of global growth has been the U.S. consumer, whose collective spending amounts to 70 percent of national GDP, but that spending is likely to deliver no household deleveraging. Aggarwal posed the question of whether the global trade imbalance was a core U.S. problem and then compared the conundrum facing consumers to that facing banks: global banks are told they need to lend more, but also to increase their balance sheets – these being antithetical demands. In this same way, consumers are being asked to save more to reduce U.S. dependence on consumption in the long-term, but also to spend more in the short-term to jumpstart the stalled economy. Nollen agreed with this observation and reiterated the paradox that the United States needs both more and less consumption at the same time. He definitively noted, however, that China needs to consume more and save less to stimulate local demand and promote economic balance in the global system. Busch explained that China cannot do this without creating a social safety net to reduce its citizens’ perceived need to save.

Busch also argued that the suggested economic dominance of the BRIC countries is frequently over-hyped; they are not going to continue growing at the rate they have in the past decades as they become increasingly developed. Moreover, he stated that these countries struggle with significant corruption and a lack of transparency, making it more difficult to trade with these markets. Indeed, one indication of China’s struggle with corruption and accountability is the large number of wealthy citizens seeking to emigrate from China to the West.