As President Obama and Chinese President Xi Jinping settle into conversation in California for the weekend, there’s talk of a new kind of G-2 alliance between the nations, and even a “grand bargain” over issues like trade, the structure of global institutions such as the IMF and the World Bank, and security issues. The idea is to reset U.S.-China relations, which have been tense in recent years, and hopefully restart world growth, which has been lagging, in the process.
It’s a wise goal. China and the U.S. are now the two strongest legs of the stool that is the global economy (Europe is faltering). They are not only the two largest economies in the world, but also represent the biggest single chunks of growth – and despite their differences, the countries’ major economic challenges are actually strikingly similar. Let’s count the ways.
1. Jobs for the middle class. Both China and the U.S. have bifurcated economies. Jobs at the very low end are plentiful – 8 out of the 10 fastest-growing job categories in the U.S. are in low-wage areas like tourism and leisure. Even as coastal wages rise in China, factories are moving inland to take advantage of another 20 years’ worth of low-paid workers; there are still hundreds of millions of people in China living on less than $2 a day. While both countries have a talent shortage at the very top end, workers in the middle are out in the cold. Chinese college graduates have a 40% unemployment rate; meanwhile, American graduates are facing the toughest job market in decades, which brings us to …
2. Education reform. In the U.S., globalization and technology-related job destruction have hollowed out middle-class jobs. But research shows that technology is historically a net job creator – only when the pace of education doesn’t keep up with technological change does it become a job destroyer. The U.S. needs a rethinking of STEM (science, technology, engineering and math) education, which will be required for an increasing chunk of new jobs in the future at all levels, as well as a revamping of secondary education and community-college programs to better align educators and job creators.
China, on the other hand, has plenty of engineers but not enough creative thinkers. At the Fortune Global Forum in Chengdu, which I’m currently attending, there’s a lot of talk about how Chinese universities can de-silo students in various disciplines and bring the best of American liberal-arts-style creativity to education and companies, in order to climb up the economic food chain. As McKinsey global managing director Dominic Barton noted in one session, by 2020, there will be 24 million jobs in China, many of them midlevel, for which there are no skilled workers.
3. Rising health care costs. As countries get wealthier, and older, there is a growing demand for health care – and rising associated costs. The U.S. has already seen this play out, of course; we have less a deficit problem than a longer-term health-care-spending problem. Now China is beginning to see it too. Nine percent of the population is over 65, but that number will rise to 25% within the next 30 to 40 years, according to statistics shared by Johnson & Johnson chairman and CEO Alex Gorsky at the Fortune panel. Despite our wealth gap with China — average American living standards are about six times higher — neither country has a particularly efficient health care system or a broad social safety net. And in both countries, economic security could well be increased by further health care reform — in the U.S., about one-third of those who cycle in and out of poverty do so because of a health care emergency. In China, the lack of adequate state health care is one reason that the savings rate is so high, and consumption (which is desperately needed to rebalance the economy) remains lower than it might otherwise be.
4. Tax reform. In the U.S., we have a convoluted tax code that favors both rich individuals and corporations and creates perverse imbalances in our economy. Apple, for instance, recently made the largest-ever bond issuance rather than take overseas cash back home, in part because the U.S. tax code favors debt over equity. Meanwhile, as former U.S. Treasury Secretary Hank Paulson pointed out at the Fortune conference, China desperately needs tax and finance reform as well, particularly at the regional level. In the Middle Kingdom, more debt might actually help things: if municipal governments were able to issue bonds, they could stop relying solely on real estate sales for revenue, and thus help deflate a growing housing bubble.
(MORE: The Importance of Pork in China)
5. Smart growth over growth at any cost. GDP growth in China and the U.S. has slowed in recent years, and both countries need fundamental changes in their economic models in order to get back on track in a sustainable way. The U.S. is on the upswing, but much of the recovery so far is based on Federal Reserve money dumps and the resulting investor-led recovery in housing. Wages are still flat, and good jobs hard to come by (see challenge No. 1).
Ditto China: after the financial crisis, policymakers received kudos for acting quickly with a massive stimulus plan. But much of the stimulus reinforced old ways of doing business by encouraging government-led infrastructure projects, real estate development and loans to state-owned businesses. There are now worries about a raft of nonperforming loans in the Chinese state banks, something that even the CEOs of state-owned enterprises at the Fortune conference have fretted about.
Of course, both China and the U.S. need to cooperate to solve their problems – China needs to rebalance its currency, play by global trade rules and liberalize its service sectors; and the U.S. needs to be more open to Chinese investments like the recent Smithfield bid, and to welcome China’s thoughts on how to reform and reinvent the Bretton Woods institutions for the 21st century. The time for a real G-2 is here.