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Bold open-mindedness essential


For the past 20 years of the 50 years after the former US president Richard Nixon's China visit, the US and Chinese economies have been the central dynamic of the world economy, including their own bilateral trade relationship. Indeed, it dawned on me during the Asian crisis of 1997-98 just how important China's position had started to become, and it was among several factors that led me to come up with the BRIC acronym, standing for the likely rise of the economies of Brazil, Russia, India and China, when I first wrote about it four years later in 2001. China's impressive resistance to get caught up in the vicious circular game of currency devaluations that swept through much of the region was the first sign of how central these economies had become. The positive response of the US treasury secretary at the time to reverse his position on the seemingly endless rise of the dollar against the yen, rumored to be encouraged by Beijing, was central to halting the Asian crisis.

Since 2001, probably something like 80 percent of all global nominal GDP growth has directly resulted from the ongoing rise of the size of the US economy, and of course, the staggering rise of China's.

At times, and indeed, over the whole of that period, the Chinese contribution has been slightly higher than that of the United States, but together their influence has been utterly dominant.

Indeed, even though statistically speaking there have been periods when other regions played a bigger role, much of their driver to rising growth was through exports, which were primarily a result of the strength of the US and China. I have highlighted repeatedly that without the Chinese contribution, world GDP growth would have been notably weaker than the 3.7 percent of the last decade, and the 3.9 percent of the previous one, both of which were significantly above the 3.3 percent of the previous two decades.

And without the US, both in terms of its own domestic demand, but also importantly, its active facilitation of capital flows from and to China, and helping bring China into the international monetary system, it would have been weaker still. Absent these forces, world growth in the past two decades would probably have been closer to 2 percent than near 4 percent, and society much poorer for it, including in both the US and China.

For the rest of the world, to some extent, we have lived off the fruits of the US and China in terms of growth, whether it be directly though international trade, or the capital flows that have also been activated over this era. Indeed, even within the overall BRICS countries, today, China is more than twice the size of the other four put together, and following the recent news of the final 2021 GDP statistics, China's close to $18 trillion is towering above the rest of them. India has the potential to make a bigger contribution to global GDP, given its demographics and its starting base coming out of this stage of the COVID-19 pandemic is quite positive. However, unless we can maintain the close cooperation and strength of both the US and China in the next 20 years, the world economy is going to look very different.

Without their persistent performance, the European Union, for example, would have to truly find a source of strong domestic demand growth, especially Germany, which might require a dramatic shift in their approach to the eurozone fiscal stability pact (which in any case, might be no bad thing), and Japan would struggle to register any positive GDP growth without massive reforms. The marginal influence we might all have to look for, could be India, which while a great addition, is unlikely to deliver for the rest of the world.

So, despite all their considerable differences, somehow the US and China have got to try and keep their mutual economic benefits continuing. There are a number of crucial parts to this.

They need to ensure that their own domestic growth remains as buoyant as possible in terms of demand, and their own consumption and investment. In the US case, what's needed is probably stronger business investment relative to consumption, and ideally, more savings. In China's case, the opposite is needed, more private consumption, less fixed investment, and ideally, less domestic savings. Achieving these goals in themselves might be extremely useful for other more international goals, not least as it might result in a more sustainable long-term path of international trade, in which China imports more relative to its exports, and the US exports more relative to its imports.

If this can't be achieved, a reoccurring stumbling block on the international economic scene surrounding trade imbalances and perceptions of trade fairness will continue, and indeed, influence other challenging areas also, such as capital flows, investment in sensitive industries, and representation in international organizations and global governance, including the representation of the renminbi in global finance, including its share in the Special Drawing Rights basket, the accounting currency that underlies the functioning of the International Monetary Fund.

When seen through an economist's eyes, many of the other issues that have become apparent sources of conflict and disagreement should be much more manageable if the two leading countries in the world can recognize these rather important basics.

The author is former chief economist at Goldman Sachs. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn