What the World Needs Now is Economic Cooperation

Photo: A summit with leaders of the member states of the Trans-Pacific Strategic Economic Partnership Agreement (TPP).

Last week my Global Conversations Tour took me from the US to Seoul and Tokyo before heading to the Penn Wharton China Center in Beijing for a week full of exciting events. There is so much going on in East Asia, and it is so great to listen to and learn from prominent Wharton alumni who are business and political leaders. 

Clearly, these are challenging times in East Asia. Korea and Japan have a long list of domestic to-dos: increasing female labor force participation; helping people remain economically active when they retire from full time careers; stimulating innovation in big conglomerates; and fostering entrepreneurship and start ups. For Japan, these are ongoing issues, a hard slog with no real prospect of radical change. Things could be different in Korea.

The prospect of Korean re-unification is beguiling. For older South Koreans it is a deeply emotional issue, reuniting families after 60+ years. For politicians it's more strategic, relying on and making possible better relations with China. But for economists, the issues are broader.

The costs of Korean reunification would be massive–probably requiring financial support from China, Japan, and the US. But the long-term economic benefits could be even larger. Immigration is close to a cultural taboo in Japan and Korea. Korean re-unification offers the prospect of a 50% increase in the country’s population, and the north is much younger than the south.

There's no time line for re-unification because the trigger, inevitably, will be a major political implosion in hermetically sealed North Korea. But people in the south are preparing—politically, economically, and emotionally.

Despite these major domestic concerns, the biggest issues in both Korea and Japan today are external–with major questions about China and the US dominating my conversations (I spent some time thinking and writing about this subject on LinkedIn in July and August as well).

On the one hand, will China be able to execute a soft landing to higher quality but lower growth rates based on domestic consumption and private investment? Or will China plummet into Japan-like stagnation—dragging down Asia and global commodity exporters with it? 

On the other hand, if and when the Federal Reserve raises US interest rates, will this help other economies by increasing the competitiveness of their exports (via a higher dollar)? Or will higher US rates hurt other economies by triggering large-scale capital outflows to the safe haven of American investments?

Two simple observations:

First, while China does look like Japan in some troubling ways–too much government investment today with a declining population tomorrow–Japanese-style stagnation does not seem in the cards. The main reason is that China’s domestic market is immense and still growing, with hundreds of millions of middle class consumers. Beneath the headlines of stock market volatility and frantic government reactions, a real Chinese private sector economy is emerging to serve these consumers.

Chinese private sector companies are now competing with western firms for market share in China (think about the rise of Xiaomi as it takes on Samsung in smartphones). This is a big problem for Samsung, sandwiched between low cost Xiaomi and premium priced Apple. But it’s great for consumers in China and elsewhere. And it’s very good news for those hoping for the growth of a vibrant consumption-based Chinese economy and a vibrant Chinese private sector.

Second, when it comes to higher US interest rates, economies with strong fundamentals will benefit from a higher dollar because it will promote their exports whereas economies with weaker fundamentals will be challenged by the specter of large and rapid capital outflows.

Now would be a good time for China and the US to send a positive signal to the world that the two biggest economies are working together.

This is certainly good news for Korea and Japan, probably China too. But there are challenges for countries where booming commodity exports in recent years have concealed other economic problems, problems that have now been exposed as lower Chinese demand and a stronger dollar have pushed oil, gas, and iron ore prices way down. Globally, the focus has been on Brazil and Russia, however one must also look at Indonesia and Malaysia.

Slower Chinese growth and higher US interest rates are new realities that will reshape not only Asia but also the global economy for years to come. Everyone will have to respond to these realities. As I head to Beijing I am reminded that now would be a good time for China and the US to send a positive signal to the world that the two biggest economies are working together.

Creating a pathway for China to join the US-led Trans Pacific Partnership (TPP) could be that signal. Twenty years ago the US led the creation of the World Trade Organization. China was not a member at the outset, but it joined 5 years later. Today it is clear that Chinese participation in WTO has been good for China, has led to significant economic reform in China, and has been good for the US and the world.

It’s time to replay the script where TPP is concerned. The US wants to bring together the major economies on both sides of the Pacific in a comprehensive new 21st century trade agreement focused less on tariff reductions (because tariffs are already low) and more on “behind the border” issues like market access rules and intellectual property protections. This is a laudable goal.

A 21st century Asia-Pacific trade agreement without China, the world’s biggest trader, would be incomplete. Everyone–in China and around the world–will benefit from more market reform in the middle kingdom. Creating a clear Chinese pathway to TPP membership would be an important element in promoting reform. It would also emphasize that the world’s two biggest economies are working together on a win-win-win future—good for the US, good for China, and good for the world.

Geoffrey Garrett is Dean, Reliance Professor of Management and Private Enterprise, and Professor of Management at the Wharton School of the University of Pennsylvania. Follow Geoff on Twitter.