Obama's dependence on China

To create US jobs, he'll need to make sure Beijing doesn't rev up its export machine.

Generating jobs in the US will take more than bailouts of faltering firms, handouts to "green" industries, or stimulus spending. In its early days, the Obama administration will need to also look to China to fix an imbalanced trade relationship that not only helped create the US housing bubble but could delay an end to this recession.

The giant Chinese export machine has fallen swiftly as US consumers have been forced to turn thrifty. One sign: Electricity generation in China, which had been rising 15 percent a year, fell 7 percent in November from a year earlier.

How China responds to its economic downturn will be watched carefully. Last year, it was the greatest contributor to global growth. US Treasury Secretary Henry Paulson visited Beijing last week to persuade it to avoid revving exports with more subsidies or by manipulating its currency to keep exports cheap. It's not clear if his gentle persuasion will work.

A follow-up trip to China by Barack Obama himself soon after he takes office may be in order.

During recent good times, China churned out inexpensive products that Americans eagerly bought, helping to keep inflation low. But that flood of goods also destroyed entire US industries. And with $2 trillion in reserves, China recycled its export dollars back into US credit markets. It is now the largest holder of US Treasuries, beating out Japan in September.

That flood of money helped to lower the price of US mortgages, pushing up home prices until the bubble burst in 2006-07. Even now, China's trade surplus with the US is at a record high – a sure signal that trade ties are still out of whack.

Both the US and Europe want China to shift its economy from the old Japanese model of being export driven. Beijing needs to spur its people to spend more, save less, and create a consumer-driven economy. Otherwise, pressures will grow in the West for protection against Chinese exports and to open closed markets in China.

Mr. Paulson was able to fend off such pressures from Congress. But Obama, who has often spoken out against free-trade pacts, has an economy to fix. He may sacrifice other aspects of US-China ties and threaten retaliation if China doesn't slow exports.

The signs aren't good. China, which began to help the world by raising the value of its currency in 2005, has recently reversed course – a boost to its exports. And part of its economic stimulus includes an increase in tax rebates for exporters.

Beijing may be worried that economic growth may soon fall below a level that can sustain the need to create 1 million jobs a month for China's 1.3 billion people. Without much of a social safety net, the Chinese are unlikely to stop saving and spend. Per-capita gross domestic product is only $2,000. Protests in rural areas are rising, and the Communist Party fears for its rule.

Last month, China marked the 30th anniversary of its embrace of capitalism after decades of Mao Zedong's mistakes. It is now the world's fourth-largest economy and may equal that of the US by 2020. The time for it to shift from an export model is long overdue.

The world's free-trade system requires a China that contributes to it rather than abuses it. Obama will need to carry that message to Beijing as soon as he can.

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