China to US: New president? Big deal

The timing of China's fiscal announcement this weekend is notable. It comes just ahead of the White House economic summit of G20 countries. As that meeting approaches, an outgoing US president, a not-yet-US-president, and a lame-duck US Congress are discussing a second stimulus plan costing maybe $100 billion to $200 billion--which might happen before the inauguration, or possibly not. Meanwhile China's government stuns global markets by promising to inject nearly $600 billion of spending on infrastructure and social welfare this year and next. Supposing the US plan ends up providing $200 billion, that would be roughly 1.5 per cent of US GDP; $600 billion is roughly 15 per cent of China's GDP. Remind me, which country is taking the lead in managing the global economy?

True, doubts surround the details of China's proposal. It's unclear how much of what they are proposing is really additional to existing plans. And of course the timing was not determined entirely by the approaching summit. Figures about to be released are expected to show a sharp deceleration in Chinese growth; announcing a big stimulus in anticipation of this makes sense domestically. Nonetheless, the new initiative--described by Chinese officials as "massive"--sure gives President Hu Jintao something talk about when he meets George Bush later this week. Up to now, the US and the West have been urging China to do more to help stabilize the world economy. Suddenly, China is setting the pace and it is the US and Europe that are dragging their feet. A sign of things to come?

While giving that some thought, here is some useful prep on the summit. Morris Goldstein at the Peterson Institute for International Economics reiterates his "ten-plus-ten" plan with characteristic force and clarity. And in a remarkable feat of timeliness, VoxEU publishes a collection of short and (putting China's announcement to one side) bang up-to-date essays in an electronic volume edited by Barry Eichengreen and Richard Baldwin, "What G20 leaders must do to stabilise the economy and fix the financial system". It includes fast accessible pieces by many of the best international-economics and finance scholars in the world, including Willem Buiter, Raghuram Rajan, Dani Rodrik, Michael Spence and others. By the way, my spirits lifted to see Dani, who is usually inclined to pick holes in the orthodox case for open markets on the grounds that it is all so complicated, propose these refreshingly simple-minded phrases for inclusion in the final communique:

The weeks and months ahead will be trying times for economic policymakers everywhere, as they try to contain the fallout for output and employment. Raising trade barriers against imports will be a temptation, especially when currencies fluctuate so much. But the experience with the Great Depression teaches us that this is the surest way to magnify the costs of the crisis, and to spread it to other countries. Hence the most serious challenge for the global trading regime at the present is to ensure that the financial and economic crisis does not lead to a vicious cycle of protectionism, greatly exacerbating the economic downturn.

So we jointly commit ourselves in public to not raising protectionist barriers in response to perceived threats to employment from imports. We further ask the secretariat of the World Trade Organization to monitor and report unilateral changes in trade policy, with the purpose of "naming and shaming" G20 members that depart from this commitment.