The Global Financial Crisis: An Economic Meeting Place Between the U.S. and China

Dec. 5, 2008 – Karen Yang works at an import jewelry shop in Chicago's Chinatown neighborhood. She said the word among business owners is that times are tough and sales are down.

Just up the street from her, a woman behind a counter selling Oriental décor nearly breaks into tears over the slowing economy.

"No business for three months," she said, too choked up and embarrassed to give her name.

Will President-elect Barack Obama be their economic savior? That answer, in part, depends on where he takes the U.S. relationship with their homeland of China, experts say.

With increasing interdependence between the U.S. and China, the two countries will need to work together to confront the global financial crisis, said Sam Crane, Asian studies professor in the political science department at Williams College in Massachusetts.

"We rely on China holding our debt and they rely on us to buy their stuff," Crane said. "That basic arrangement, I believe, has to stay in place and not be weakened, or the economic crisis in both places could get worse."

The two countries have already taken separate strategies for dealing with the economic crisis. The U.S. has decided to pour $700 billion into buying up bad loans from the country's largest financial institutions. China recently revealed its plan to create a nearly $600 billion New Deal-style infrastructure building and job creation package over the next two years.

The tie that most closely binds the U.S. and China is China's purchase of significant amounts of America's $10 trillion national debt through low-rate, long-term bonds. Approximately one-quarter of the debt is owned by foreign countries, with China second only to Japan in holdings. In turn, China depends on Americans spending money on China's low-cost products to keep their economy booming.

"Imagine how working-class Americans would get by without access to relatively cheap Chinese products at Wal-Mart," Crane said.

But with the downtrodden economy, Americans are tightening up their wallets and China's growth has slowed from 9-10 percent annually to 7-8 percent.

This could have several implications for both countries.

"What it means for China, that slowdown, it creates a huge potential threat to social stability," said Clayton Dube, associate director of the University of Southern California's U.S.-China Institute.

Chinese citizens are more willing to demonstrate against the government than ever before, Dube said. If unemployment rises dramatically, especially among those who are already disenfranchised, it could lead to instability throughout the Chinese workforce.

"The Chinese are very aware that there have been winners and losers in this economic game," Dube said, as the gap between the rich and poor grows.

Unemployment is also a serious concern in the U.S., with the jobless rate reaching a 6.5 percent, a 14-year high. And spending is also down.

"I think it is important for Obama to resist the ‘blame China' crowd, those people who complain that China has ‘stolen our jobs.' The world economy is way more complicated than that," Crane said. "Perhaps in private talks with President Hu [Jintao] next year, Obama can make this explicit: We will keep our markets open to Chinese products, if China agrees to hold on to our debt."

The U.S.-China Institute published an analysis, "Obama and China," which was part eight in a series on the 2008 U.S. election. In a video report, reporter Mike Chinoy said, "The policies adopted by the next occupant of the White House will play a central roll in the question critical to the future of the entire world."

The report shows Obama criticizing China in campaign speeches for undervaluing its currency. But he is committed to free trade.

"We're going to try to facilitate trade and investment flows with a China that plays by the rules and try to block it when it doesn't," said Obama adviser Jeffrey Bader with the Brookings Institute in the USC report.

"If foreigners, especially East Asians — Chinese, Japanese and Koreans — stop buying U.S. Treasury bonds, we would face a much worse financial situation here," Crane said.

There is also the issue of product safety. If both the U.S. and Chinese governments expect the American public and the rest of the world to continue buying Chinese-made goods, updated regulations must be placed on products that leave China, Dube said.

And regulations can't be done through legislation alone, Dube added. There have to be monitors in place, helping China with upgrading their standards of inspection.

"Creating a constructive relationship, in general, could have beneficial effects across a range of issues," Crane said.