Obsession with China masks West’s inertia

This is my comment from this week’s Fund Strategy.

It is easy to become so focused on someone else’s problems that you fail to grapple with your own. That is a lesson that the West’s leaders, fixated with China, would do well to learn.

No doubt China has its faults. It is arguably keeping its currency artificially low to help bolster its exports. But western leaders are too eager to scapegoat China for their own failings. America and Britain would have a weak export sector even if their trade with China was in balance. Both Anglo-Saxon economies have suffered a long period of deindustrialisation.??Nor are the spats restricted to economics. America has got into rows with China recently over the Copenhagen climate summit, the Dalai Lama, Google, Iran and Taiwan arms sales.??These disputes are happening against a backdrop of a western debate over how best to respond China’s rise. It is the cover story of this week’s Economist and the theme of a new book by Anatole Kaletsky, an economics commentator on The Times (London).

There are two key reasons why this obsession with China is unhealthy. First, there is a danger that the conflict between the West and China will spill out of control. Given the importance of China in the world economy this risk is particularly worrying. ??China is already retaliating against punitive measures by the West. Last week it announced anti-dumping duties on American chicken imports in a response to American tariffs on Chinese steel.??But, even more important, the verbal assault on China is a distraction from the West sorting out its domestic economic problems. If the western economies are restructured the main motivation should not be to compete more effectively against China. More likely, though, the West will do little restructuring at all rather than tackle the formidable challenge of its domestic weaknesses.

Western economic debate focuses on the relatively easy questions rather than the hard ones. It is obsessed with the correct monetary and fiscal policy to help offset the immediate impact of the economic downturn. But long-term structural weaknesses get scant attention.

Last week’s Green Budget from the Institute for Fiscal Studies and Barclays Wealth gave some idea of the scale of the problem. It estimated that Britain’s trend rate of growth was only 1.75% rather than the 2.75% the Treasury assumes. Although one percentage point might not sound a lot it makes a huge difference when compounded over several years.

Western leaders should stop fretting over China and tackle their domestic weaknesses.