Op-Ed Contributors

US treaty could threaten growth

By Kevin P. Gallagher (China Daily)
Updated: 2010-07-07 07:54

The US and China discussed a bilateral investment treaty (BIT) at the Sino-American Strategic and Economic Dialogue (SE&D) in May. If the final negotiated text looks like the majority of US BITs it could threaten financial stability and economic growth in China.

The US and China began negotiations toward a BIT in 2008 under the George W. Bush administration. After taking office, US President Barack Obama gave his seal of approval to the negotiations at the November 2009 SE&D when the two nations agreed to "expedite" them.

China's development over the past 30 years has been unprecedented. Not only has per capita growth been faster than 8 percent a year throughout the period, but according to the World Bank, China has also brought 300 million people - a number roughly the size of the entire population in the US - out of poverty.

China has to be the best "globalizer" among developing nations. It hasn't followed "Washington Consensus" policies of rapidly liberalizing trade and investment and pulling the state out of economic affairs that has been followed in Latin America where growth rates have been minimal.

To be sure, China has embraced markets and realized that integration with the world economy is essential for development. Its approach can be characterized best by a phrase used by Deng Xiaoping, "crossing the river by touching each stone". In other words, the Chinese have taken a gradual and experiment-based approach to globalization where there is recognition of the key role for the state in fostering markets during the development process.

Taking this approach to the macroeconomic realm, China has adopted a managed approach to monetary and exchange policies where the yuan is pegged to the dollar and coupled with capital controls to grant the country independent monetary policies.

In numerous recent studies, economists at the Institute of World Economics and Politics, affiliated to the Chinese Academy of Social Sciences, have shown that China's capital controls have not only been effective in maintaining financial stability before and during the global financial crisis, but they will also be essential to help China loosen its hold on the exchange rate over time.