Bill Mundell: China should invest in U.S. infrastructure

June 8, 2013

xi jinping obamaWhen Chinese President Xi Jinping meets Friday and Saturday with President Obama at the Sunnylands estate in Rancho Mirage, the agenda will likely focus on the same issues that have dogged the relationship for years – currency values, North Korea, protection of intellectual property, human rights – and some newer ones that have heated up recently, such as cybersecurity and conflict in the South China Sea.

This will all be discussed in the context of China’s historic rise and the seeming inevitability of China sometime in the next decade eclipsing the U.S. economy – which hasn’t happened since the U.S. became the world’s largest economy in the 1880s.

In this Feb. 14, 2012, file photo President Barack Obama and Chinese Vice President Xi Jinping, left, shake hands during their Oval Office meeting. Xi, now president, meets Obama again for a two-day summit in Rancho Mirage on Friday and Saturday.

History teaches us that, when emerging power confronts established power, there is potential for conflict, whether actual war or, in the case of the Soviet Union, proxy wars and a long, expensive and, ultimately, draining Cold War.

Both China and the U.S. know how important it is to avoid this. They can minimize that possibility by increasing their already-significant economic interdependence, which creates powerful incentives to resolve any conflicts and distinguishes the U.S.-China relationship from other historical power contests.

But they also need a new and more positive interdependence. That would create what President Xi has called “a new type of great power relationship.”

We need to come up with a new framework that better aligns China’s need to invest its massive reserves – $3.3 trillion and rising – and our need for infrastructure renewal. China already invests in the U.S., in the form of 8 percent or so (and falling) of our outstanding government debt. But China is also looking to invest in U.S.-based hard assets.

U.S. infrastructure satisfies this objective and is a sufficiently large and needy target. Some estimates put the U.S. infrastructure deficit as high as $3 trillion. It is difficult to imagine America’s continued prosperity if this is not addressed.

China’s foreign direct investment may exceed $1 trillion over the next seven years. Last year, China deployed more of this capital in Australia, the 12th-largest economy, than in the U.S., the largest.

We are losing out on this historic opportunity to restart America’s growth and maintain our status in the world because of reflexive fears that permeate our relationship with China. It has prevented us from working out a rational noncontrolling architecture for foreign investment in our infrastructure, as large parts of the rest of the world have done.

If we can accomplish this, we can entice the new power to invest in the established power, harness the remarkable energy of China into cooperation, not conflict, and finally replace the mutual mistrust with goodwill.
The Chinese should realize that this can’t happen without changing the political incentives of our leaders here.

If the Chinese were to announce that they intend to invest, say, a minimum $100 billion per year for the next five years in U.S. infrastructure, they would create a flurry, rather than the trickle, of U.S. state-level proposals.

The greater competition for those dollars – in effect, a beauty contest between the states – would transform the political calculus of local leaders. Chinese investment would become a vehicle for improving the lives of these leaders’ constituents, rather than something to be feared. This state-led initiative could open the way for a much freer flow of investment into the country. The federal government would surely follow the states’ lead.

Notwithstanding the chorus of China watchers channeling a Nixon-meets-Mao moment – and there is at least some possibility of a breakthrough on North Korea – the real shift in the long-term relationship between China and the U.S. is more likely to happen between Beijing and the states. Presidents Obama and Xi should create the framework for that to happen.

Bill Mundell is a member of the advisory board of the Annenberg-Dreier Commission at Sunnylands.

Published in Orange County Register and Asia Times

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