U.S. Courts China for Trade Balance; Deal Is Key to G-20 Strategy

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Byline: Patrice Hill, THE WASHINGTON TIMES

The Obama administration is pursuing a grand bargain with China that would address the lopsided economic relationship that contributed to the financial crisis and prevent it from destabilizing the world economy in the future.

The deal with China would be a critical part of a framework agreement the White House is hoping to forge with Group of 20 leaders in Pittsburgh this week, aimed at bringing greater balance to economic growth around the world.

The administration is using a combination of sticks and carrots to win Beijing's agreement. It recently imposed sanctions on Chinese tires in a public signal that it will resist any flood of imports, but it also is working behind the scenes to champion China's bid for a greater say in international economic venues by supporting a 5 percent increase in voting shares for China and other major emerging economies within the International Monetary Fund.

The goal of the administration's strategy is to secure China's commitment to continuing a trend that emerged during the recession: more reliance on consumer spending and less dependence on exports to the U.S. to drive economic growth.

In return, the administration is pledging to promote lower U.S. trade deficits, more savings and less debt-binging by American consumers, as well as committing to reduce the soaring U.S. budget deficit, which has been worrying China.

The lopsided trade imbalance between the U.S. and China - with the U.S. trade gap burgeoning to more than $250 billion at its peak - is considered a root cause of the financial crisis. Analysts say the credit and housing bubbles that caused the crisis were fed by the constant flow of large sums of money into U.S. securities markets from China as it recycled more than $1 trillion of earnings on exports to the U.S.

The Chinese inflows helped reduce conventional mortgage rates to record lows and helped spawn a subprime mortgage industry whose goal was to quench investors' desire for higher-yielding mortgage investments.

While China is widely criticized for too much emphasis on exports and building excess reserves that have the potential to spawn financial bubbles, the U.S. is faulted for spending beyond its means, saving too little and going deeply into debt to purchase all manner of goods from China and the rest of the world.

With economic recovery getting under way after a long and painful downturn, the White House views the G-20 summit as an opportunity for new beginnings and for making commitments to ensure mistakes are not repeated.

This is a time of moving from one way of doing business to another way of doing business, said Mike Froman, deputy national security adviser. He said the White House is negotiating a framework with other summit leaders for committing to more balanced growth and the structural reforms needed to achieve that.

The agreement also would call on Europe, Japan and other Asian countries to make structural changes needed to balance growth. The commitments would be enforced by IMF reviews and peer pressure on G-20 leaders to shoulder responsibility for maintaining sustainable growth in the global economy. …