The President's Inbox: Asia and the Economy

KAY KING: Good evening, everyone, and welcome to this evening's meeting. I am Kay King, and I'm going to be the presider this evening.

Before we get started with the program, I want to go through the usual business of asking everyone to please turn off all cell phones, BlackBerrys and electronic devices. And I would ask that you turn them off completely, because even if they're on vibrate, they interfere with the sound system. And also I would like to remind everybody that this meeting this evening is on the record.

Again, I want to welcome you. This meeting is one in a continuing series that we have going on right now at the Council on the President's Inbox, a series that really looks at the major issues confronting the Obama administration in the foreign policy arena.

Tonight we are going to be discussing the global economy, trade, and U.S. relations with Asia, all issues very much in the news and very topical today, and obviously on the top of the Obama administration's agenda.

We'll start by looking at these issues as separate, distinct issues, but then inevitably the three come together. And so we will also look at them as they are linked.

We're hoping that we can, on the global economy, address the kind of range of actions that the Obama administration has been taking to determine not only the impact on the U.S. economy but on the broader global financial crisis. Also, as part of our discussion, we'll look at trade, and obviously that is a very -- an issue that's on the top of the Obama agenda with his trip to Ottawa today. And finally, of course, with Secretary Clinton's trip to Asia this week, it's really a perfect time to be looking at the U.S. relationship with Asia. So we will go through those three and then look at how they all come together.

So to help us better understand these issues, I am really delighted to welcome three of my Council colleagues this evening. First, let me welcome Liz Economy. Liz is the C.V. Starr senior fellow and director of Asia studies at the Council. She's published widely on China's domestic and foreign policy. And her most recent book is titled "The River Runs Black: The Environmental Challenge to China."

Sitting next to Liz is Ted Alden, and Ted is our Bernard L. Schwartz senior fellow who specializes in international competitiveness. He has worked at the Financial Times prior to joining the Council as a reporter, and he has written extensively on U.S. economic issues, trade policy and homeland security.

And while your original invitations listed Caroline Atkinson as our third speaker, I'm sorry she can't -- while I'm sorry she can't be with us, I really am delighted that Sebastian Mallaby has decided to forgo his presider role and agreed to join on the panel. And I think, as most of you know, Sebastian is our Paul Volcker fellow in international economics. He also runs the Maurice Greenberg Center for Geoeconomic Studies. Prior to joining the Council, he was a member of the editorial board at the Washington Post and a columnist there, and he also spent 13 years at The Economist.

So I think what we'll do is get started with you, Sebastian, if you don't mind, and that's focusing on the global economy. And unfortunately, the economic news continues to get worse, and the downturn really appears to be accelerating to the point where major economies like Britain, Germany, Japan, not to mention emerging economies like Russia and Brazil, have experienced unprecedented contraction.

And what I really want to get a sense from you is are all these measures that the Obama administration has taken in the economic realm, you know, are they leading -- are they going to kind of do the job, and not only with respect to the U.S. economy but to the broader global economy?

SEBASTIAN MALLABY: That's a good question. I mean, the challenge is enormous. If you look at the International Monetary Fund projections, for example, which were updated in January, what you see is a really cataclysmic reduction in their projections for global growth, even against what they were thinking in November.

If you take an economy like Russia, for example, which is one of the biggest changes, the amount by which Russia is expected to grow in 2009 has collapsed by 4 percentage points in the space of two months. So you have a huge dropoff. I think we haven't seen yet what the political knock oneffects of that might be in terms of heightened Russian authoritarianism or other effects. And around the world, there are different regions with different stresses coming out of this.

If you ask, "Has the Obama administration done enough yet to counteract this?" I think there's, you know, three points to make. One is that everyone would agree, given the severity of the downturn, that a lot of action is necessary from government. I mean, we've run this experiment before in the 1930s. When demand in the economy starts to spiral downward, it doesn't kind of correct itself by itself. And that was the lesson of the 19th century more generally, that when you had bad downturns without modern macroeconomic policy to counteract that, the downturn simply carried on.

So I think everyone would agree that you need to do bold things. Whether it's enough, I think not yet, actually, partly because some of the measures are lacking in detail, and so, notably on the financial rescue plan, there are a lot of dot-dot-dots to be filled in still, and also because the scale of the challenge is such that you really need a lot of action from other countries.

And in particular, I think the surplus countries, which had surplus savings going into this crisis, meaning particularly China and Germany, are going to be very, very important in coming forward with big stimulus .And looking forward to the April 2nd summit in London for the G-20, that's got to be the most urgent thing on the agenda is to coordinate the global response with stimulus of the scale that the Obama administration is trying, they've got to do that internationally.

KING: Thanks.

Ted, I'm going to turn to you now on the trade issue, and hoping I'm not putting you too much on the spot, but given that President Obama was in Ottawa, your homeland, today, and since, as a candidate, his apparent position on NAFTA caused considerable heartburn with Canadians, not to mention the "Buy America" provisions in the stimulus, can you give me a little bit of a sense of how those discussions might have gone today between President Obama and the prime minister? And also if you could maybe address the broader administration policy with regard to trade now that candidate Obama has become president.

TED ALDEN: Well, you know, I think, as president, Obama has done probably what we would have expected, which is to begin moving from the campaign rhetoric, which had a harder edge on trade, particularly in the places where that played well, in certain states in the Midwest, to his status as president now, which is he needs to think very carefully about the implications of each of these measures.

Reopening NAFTA at this time would obviously be a move that would raise a lot of concerns, not only in Canada and in Mexico, but around the world. And not surprisingly, the signal sent to the Canadians today was very much, well, you know, he's not entirely happy with the labor and environment provisions, but it's not a first-tier priority at the moment, and we have other more important things to work on in the relationship.

I think, with respect to the "Buy America" stuff, we saw something, you know, the same effort to kind of find a middle ground between the stances he took as a candidate and his responsibilities now as president, not completely knocking down the provisions in the bill, but saying in very forceful language, "We will stand by our obligations in the World Trade Organization." So, you know, I think he's off to a good start in that respect.

More broadly, I just want to say this is a very strange and interesting time in the world of trade policy. I mean, I began paying attention to this closely -- what was it -- probably 16, 17 years ago, when Ambassador Hills was our chief negotiator.

Since that time, we have built up a whole architecture of agreements with binding rules that were really a monumental accomplishment. But that was built up in the period in which growth was generally quite strong. We're now obviously in the midst of a very deep and severe downturn. And these institutions -- the WTO, NAFTA, our relationship with China -- have never been tested in this sort of environment.

So I think this is going to be the real trade challenge for this administration. You know, at the beginning of every previous administration, we asked what was the positive trade agenda? What are the deals that could still be done? What are the ways to move forward? I think the question for this administration is, how do you keep from moving backwards? How do you stave off protectionist pressures of various sorts that are certain in this environment to grow?

KING: And Liz, given that Secretary Clinton chose Asia as the first of her visits as secretary of State, it seems pretty clear that it is at the top of the Obama administration's agenda. And I'm just wondering if you could give us a sense of what items you think -- what issues you think Hillary Clinton should be raising in her discussions as she travels through the region; and even a little more detail about also what would you recommend that she be telling these leaders as she goes through these countries. What kind of recommendations should she be making?

ELIZABETH ECONOMY: Well, I think clearly Asia matters, right, and it matters a lot, and in large measure because of the issues that Sebastian and Ted have been talking about, which is, you know, you have three of the largest economies in the world, the three largest economies -- United States, Japan and China now. And not only that, but you have North Korea, which is clearly one of the world's regional hot spots that needs to be addressed quite urgently.

And I think if you look at any issue of global governance, whether you're talking about food safety or climate change, proliferation, intellectual property rights, Asia is really the center at this point in time. And what China does, what India does, is really going to shape the future of all of these issues, along with the United States. So I think it makes a lot of sense for Secretary Clinton to make her first trip there.

I think, you know, this is a very early trip, right? I think we've only had President Obama in power for a little bit over a month, right? And I can't remember when Secretary Clinton was confirmed, but it seems reasonably recently. So I don't think that this trip is a time for her to be laying out a new strategic road map for the region. In fact, I don't think she could, and I don't think she is.

It seems to me, as I've watched her so far in two countries and going to her third, including in China, that basically this is a kind of, yes, a listening tour, I think it's been called, which is a good thing, and a kind of kinder, gentler, "We're going to be more engaged" United States.

Let me say that I think we have been engaged certainly in East Asia. I don't think there's been a lack of engagement over the past eight years when it comes to China and North Korea. There's a kind of tendency to say we haven't been there, but we have been there. Southeast Asia maybe is a different story.

But I think, you know, in each place that she's visited, we've had, like, little presents given; a nice gift here or there. So we have -- you know, in Japan she met with the families of the abductees and she -- now Prime Minister Aso is going to be the first foreign leader to meet with President Obama in the United States. In Indonesia, we're talking about revisiting the Treaty of Amity and Cooperation. She's committed to attending ASEAN regional forums, something that Secretary Rice skipped a couple of times.

You know, I don't know what she's going to do in Korea. Poor Korea might get stuck just getting to talk about the free trade agreement -- (laughs) -- and about North Korea at this point, which has, you know, popped up as a very emergent issue. And in China, we already have these discussions about re-establishing mil-to-mil relations, and it seems as though there's some impetus for -- I don't know what this is going to look like, but some kind of renewed effort for a kind of discussion on climate change.

So I see this more, this first effort, as get out there to meet foreign leaders, to meet her counterparts, and basically to tell the region that we want to be engaged; we want to be more deeply engaged than we have been and we want to be more multilateral in our dealings, and we're here to listen to your concerns and we want to be responsive. And, frankly speaking, I think, at this point in time, that is the right message for her to be sending. I don't think she should be doing more. I think she needs to take stock of the situation.

KING: Actually, focusing in a little bit more on China per se, and as you indicated, we have been engaged in Asia and in China, and I think the Bush administration is really credited with strengthening our relationship with China, but a lot of people have said, and I believe Hillary Clinton herself has said, that they felt there was maybe a little bit too much focus on the economic relationship with China.

And I guess what I'd like to know from you is do you agree with that? And if you do agree with that, how would you suggest that we kind of redirect our relationship with China?

ECONOMY: Well, you know, sitting up in New York, we read these things, and we think I can't really tell whether, you know, she believes that or whether that's some kind of political power play down here in Washington. I think, you know, certainly what there was was a very aggressive effort on the part of Treasury, right. And I have Eugene, my friend here, who is part of the SED, sitting in the front row, the Strategic Economic Dialogue.

But it wasn't just on economic issues, which, of course, you know, are paramount in many respects, especially today, but also on energy and the environment. And so you had Treasury extending its reach, I think, well beyond what had been maybe the traditional brief of the, you know, Treasury Department.

And so I think we've already seen, you know, Secretary Clinton taking her climate person, Todd Stern, so clearly she's making some kind of play for that particular issue. I think if she's talking about -- and there was the senior political dialogue, it just didn't receive as much attention as the SED did. So, those things were going on. You know, I don't think it's the fault of Secretary Paulson that he was much more aggressive, perhaps.

If she's talking about introducing the issue of human rights, for example, -- and we had North Korean negotiations with China going on, and on, and on, and on, so I think the range of issues was reasonably well covered. If she's talking about one issue -- which I think was not terribly aggressively addressed, which would be human rights, I think then there's something to be discussed. And she did raise the issue in her speech at the Asia Society of religious freedom, and freedom for Tibetans and all Chinese -- religious freedom for Tibetans and all Chinese.

I mean, this is a tricky issue. And in the context of all the other priorities that we have with China, this is going to be tough. And she's picked a very difficult time, of course, to introduce this issue, which is one month before the anniversary of the 50th uprising in Tibet, not to mention we have the Tiananmen anniversary coming up on June 4th. I do think it's important --

KING: Twenty years.

ECONOMY: -- yeah, the 20th anniversary, right -- I think it's important to raise these issues, but I think, you know, again, before the secretary of State -- before the State Department gets too far out ahead of itself it needs to have a strategy. And you asked before what my recommendation would be, and let me just, you know, offer one suggestion here.

I think, yes, let's get out there and let's get back engaged with the Human Rights Council. And I think we should be strong and committed to our discussions on human rights, and talk with the Europeans who've been engaged in human rights discussions -- which haven't gone anywhere with the Chinese for the past several years also.

But, by the same token, maybe we should be focusing on issues of good governance. And doing that -- you know, so what I mean by that is transparency, official accountability, and the rule of law -- and doing that under the, sort of, rubric or guise of all of those issues of global governance, like climate change, you know, like proliferation, like food and product safety, all of those things demand better governance in China than we have today.

And so pushing those kinds of issues, by engaging China in those, you know, issues at the global level, and helping them understand that in order to address those issues effectively -- and I'd include intellectual property rights in this too, we've got to see some change and some capacity development on the ground in China.

So, that's what I see. I don't see that there has been too much of a focus on the economic side. I think it's just been a little more aggressive, and perhaps more -- well, not really successful, at least more aggressive.

KING: Staying with the topic of China, Ted, you and a colleague, Jeremy Haft, have written -- and let me make sure I got this straight, that "the economic downturn actually boosts America's competitive edge in China and presents the United States with a unique opportunity to create jobs and stimulate savings." Could you elaborate a little bit on that?

ALDEN: Well, this was an effort to put a positive spin on what, in a lot of ways, is a pretty gloomy situation, clearly. (Laughter.)

ECONOMY: Sounds good. (Laughs.)

ALDEN: So, you know, I think we actually need a -- well, there's, you know, there's a way in which, of course, the psychology of this is very reinforcing. You know, we get into a situation in which we, you know, have suddenly gone from tremendous over-optimism to, I think sometimes, catastrophic pessimism -- and I can certainly make a case for catastrophic pessimism.

But I think, you know, we very much need, in the situation we're in, to be looking for opportunities. And that was the point of that article. And the heart that -- and this really comes more from Jeremy, and I don't know if he's here in the audience; I wish he were, to spell it out -- but, you know, what the United States and China both need more than anything else is for China to begin to move to an internal demand-driven policy. I mean, we have had now two decades of export-driven policy out of China, which has resulted in an enormous build-up of Chinese reserves; imbalances in the global economy, which have been damaging to the United States and damaging to China.

So, I think there's a consensus - both China and the United States, that China needs to begin moving in the direction of greater levels of consumption by its own people. The best prospects for that are in areas involving delivery of social services -- (inaudible). You got a savings rate in China that's close to 50 percent because there's no social safety net to speak of, and people are saving for many years after their working lives end.

Jeremy has worked on the ground in China.He believes that there are a lot of opportunities for the sorts of skills that U.S. companies have, and can deliver, to help China make that transition. In the short-run, is that going to make up for the jobs that we're losing right now? No. Not close to it. But there's a way in which we can try to develop a positive agenda, working with China, to help them make that transformation.

I mean, in some ways the article was a plea to avoid going down the easy road, which is the confrontational road. Which is to say, you know, the Chinese need to move quickly on the currency; they need to revalue; it's China's fault for developing this huge surplus, and we really need to knock them over the head.

I think that there are more constructive ways to tackle this, in which the U.S. private sector and the U.S. government can work more closely with China to make a change that both countries know need to be made. So, that was the purpose of writing that.

KING: Well, looking at this from maybe a little less positive perspective, Sebastian, you have written that you agree with Secretary Geithner's assessment that China is a currency manipulator. And you've gone on to say that currency manipulation is one of the major causes of the financial crisis. I was wondering if you could elaborate a little bit on that for our audience?

MALLABY: Yeah, I think that I agree with Tim Geithner's position more than Tim Geithner does, -- (laughter) -- in the sense that, you know, when he was -- this was in his testimony, and then when he was given Q & A on this, he kind of backtracked a bit. And the signals I'm hearing are that, you know, the administration wants to wish it hadn't said that.

The reason I thought it was actually arguably constructive is that I think, objectively, it's true, as Ted was saying, that, you know, massive Chinese export-driven growth has created huge exports of capital to balance that, by definition. And once China decides to export capital on this unprecedented scale, it's going to drive down interest rates in a deficit economy, which is the United States.

And the Fed could have raised interest rates more in 2003, or so, and should have done, but the relationship between the longer end of the yield curve, and policy rates in the short-term had broken down. This was the famous conundrum that Greenspan talked about more than once. This was the so-called "savings glut" that Bernanke talked about before the crisis -- the subprime crisis hit us.

It was evident to these monetary policy experts that Chinese savings -- and, more generally, the capital flowing from the rest of the world, but I think China is at the core of it -- were doing something to the way that monetary policy was working here, and it was very difficult to prevent a bubble from inflating.

Now, there are people who say, well, we could deal with, you know, lots of capital inflows from China in other ways. We could have better regulation of our financial sector, better supervision of banks. I'm kind of pessimistic about that, having gone down that mouse hole a lot and looked at the proposals that people have for better managing the financial system. I think there are a couple that make sense, but in general, my view is that, at the end of the day, if there's huge amounts of cheap money flowing through a system there will be a bubble, it will blow up, and it will cause enormous economic collateral damage.

So, I think it's bad for us that China has this export model. I think it's bad for China that it has this export model because they've gone from growth which was 13 percent in 2007, to a projection now of less than 7 percent. On their own definition, they need 8 percent a year to generate jobs in sufficient quantities. They're not going to meet that. And so they have discovered what it's like to have an export-driven model and then see demand in the rest of the world collapse, and then you are left with nothing.

You know, there was talk awhile ago that, you know, China had become the engine of global growth. And if you looked simply at GDP numbers in the world and where the growth was coming from, it did look as though China was generating more -- extra growth than the U.S. was. But the truth was that the extra Chinese growth was dependent on being able to export to U.S. consumers. It was a model that wasn't going to work by itself.

So I think they've got themselves into a position where they -- they're stuck. And you could do export-driven growth for a long time in smaller East Asian countries, because they weren't so big in relation to the world economy. There just isn't room in the global economy for this big of an economy to grow that fast on the back of exports. So, they need to say that -- see that.

And I think -- you know, coming back to what Liz was saying, that a major challenge for this administration is to decide, diplomatically, how sensible is it, and how best can we do it, to talk to China about shifting, because I think a shift is very important for them and for us.

ALDEN: Can I just make one quick comment?

The trouble I had with Geithner's statement is the language -- the language on currency manipulation. I mean, there's no question that it's a fact that China manipulates its currency. I mean, we all know that. It, you know, strives to hold the renminbi at a particular value. That's currency manipulation on its face.

The problem is, under U.S. law, that's a term that has some consequence. And this is one of the first decisions that the Obama administration is going to be faced with, with respect to China, which is: April 15th, do they designate China as a currency manipulator? Which the Bush administration was never willing to do; they walked up to the edge of it but they were never willing to make that designation.

Now, making that designation, at some level, doesn't have any enormous practical consequences, all it does is it triggers a negotiation. But, if we make that designation, it immediately puts us into a confrontational position, vis-a-vis China, with regard to the question of the value of their currency. And I think that that will start the relationship, between this administration and China, off on a very poor footing.

I mean, there was progress made in the previous administration through negotiations, led by John Snow, with the Chinese. They, unfortunately, for a variety of reasons -- you know, the Chinese have decided to hold their currency at its present value, and I think that's a problem. But, I think if we make that designation, I think we trigger potentially escalating a confrontation with China.

That's going to be a very, very difficult decision for the administration, because if they don't make that designation, you could well have people in Congress -- the Schumer and the Grahams, come back and say, you know, we're going to start raising the heat on The Hill to force you to make that designation. So, I think this is a very difficult and consequential decision that's coming fast for this administration.

KING: Would any of you care to speculate as to what you think they might do, come April 15th?

ALDEN: I'll tell you what I think they should do, but --

KING: (Laughs.)

ALDEN: -- I don't know what they will do. It's a very, very hard decision.

ECONOMY: I don't know what they're going to do, but I do think it's an important moment in time. And I might end up agreeing with you, Ted, even though I tend to favor taking a tougher tack with China, generally.

But right now they're in the midst of their own debate. And so if you look at what some of the senior economic leaders in China are saying, and some of the economists are saying, there is a very big debate, very vibrant debate going on about what they should do about their currency.

And some are advocating that they should depreciate it because they want to kick-up their exports. And others are saying, "Look, in this global economy, kicking up our exports is not going to do any good, so let's not do that. We're not going to get what we want out of it, and we risk making everybody else really mad at us." So, I think it's a -- it's an interesting, sensitive moment in time in China, and whatever we do, we ought to take that into consideration.

Now, it doesn't mean that maybe having that leverage -- like we did with the Schumer Graham thing, for whatever it was worth -- out there, you know, as a potential stick, you know, to allow Secretary Geithner to say, "Listen, you know, I don't want to do this but I've got this sitting out here." Maybe that's worth something, I don't know, but I do think it's a difficult moment right now, and China's having its own debate about its currency.

At the same time I think it's -- the whole idea of developing domestic demand in China is, you know, the Chinese leadership has clearly pushed forth. They said, this is what we're doing, right. So, they've really, much more aggressively, pushed forward on this health plan, right, to provide health insurance and health care, you know, for the vast majority of the Chinese public. It was supposed to be done by 2020, now they're saying they're going to have it done by 2011. I don't believe it. Things never work out that way in China -- never. But, that's what they're saying.

What's interesting is, I happened to be in a meeting -- sorry to go on, but this may be sort of interesting -- I happened to be in a meeting yesterday with a senior provincial leader from China. And I was just sitting in on a meeting, his meeting was with supposed to be with somebody else. But, I was sitting there, and the other person -- the American was making the point that, in fact, this issue of, you know, developing demand was important, developing a social welfare net was critical, et cetera, et cetera. And he said, "Yes, yes, well, we already have all the mechanisms in place, they just don't work." (Laughter.)

Which was a funny thing to say, but then, as he went on, what he said is, "Actually, what we really need to do is raise the incomes of the Chinese people" -- you know, more than this idea of the social welfare net. And what I thought that pointed to was, even though they're preaching this idea of the, sort of, importance of developing a social welfare net, that still, in the back of their minds, the most important thing is this continued growth model, as they've been going -- like, raising the incomes, and that's going to serve, you know, as the mechanism to continue Chinese growth.

Anyway, it's just a --

MALLABY: Also, is it even true -- is it even true that they have it, but they -- it doesn't work?

ECONOMY: No, it's not true. It's not true.

MALLABY: It's not true. So, that's also quite revealing.

ECONOMY: So, it was funny in different ways, yeah. (Laughs.)

MALLABY: Right, yeah.

KING: Okay, well, with that, I would like to open the floor to all of your questions. And before I do, let me just remind you to please wait for a microphone, and to identify yourself by giving your name and your affiliation. And then I would ask you to ask just one question, and please try and keep it brief so that we can have as many people ask questions as possible.

So, with that, let me start right here with Paula.

QUESTIONER: Paula Stern, The Stern Group.

I guess I'd like to stay on China. And recognizing that the percentage of the GDP that goes towards -- that domestic consumption represents in China is so incredibly low, I'm wondering -- to use a famous word now -- if you would stress test the notion that the Chinese can turn around quickly enough -- either through shifting to domestic consumption with the health plan and everything else -- just how quickly can they do it? It looks like they're interested, but I'm just wondering, I mean, they've shocked us with how rapidly they've become an exports super power!

ECONOMY: All right. I'll take one stab and then, you know, welcome my colleagues to comment.

You know, I think sometimes we think about the success that China has had in terms of growing its economy and we stand in awe, as well we should, because I think what Deng Xiaoping did was he unleashed the power of the Chinese to make money, right, and to make money quickly. So it's all self-interest. It's all out there. Let's go make money!

I think the challenge, often times when you're looking at central policy as its driven down, is whether or not local officials and local business people feel that same sort of incentive, right? So what is the incentive that they have to put into place free education -- or real free education, which they're supposed to have but in many places don't; or to have health insurance with medical clinics and these kinds of things; or a workable pension plan. And I think that's -- or whatever it might be -- environmental protection.

And that, I think, is what makes it so much more difficult. And so I try to look and see: What are the incentives for these people to do the right thing? I'm not sure -- and then you have all the corruption, right, and the diversion of money that happens within the system.

And so I think we don't know the answer yet, right? It's going to take a little time to see what happens over the next -- I give them a year -- a year to see what's actually taking place with pension plans, what's actually taking place with medical clinics and health insurance. You know, it's a huge country. I mean, 1.3 billion people, 400 million of whom live on less than $2 a day! It's really incredible. I think we forget about much of what this country is really about.

And so I am pessimistic, but I want to leave my mind open to the fact that they're somehow going to find those incentives to get it done right. I just don't know what they are. And I think it's not the way that the officials have -- they've been talking about developing a social welfare net for a long time and it hasn't happened.

So I'm waiting to see what's new and what's different and I don't see anything yet.

KING: (Off mike.)

MALLABY: Yeah, as a general matter, I think, you know, any growth model builds into it sort of interest groups that do well out of that model and who are going to obstruct change. And so you know, I defer to Liz's expertise on China specifically, but you know, anyone who's lived in Japan as I did for three years, or other places, you see that export interests that do well out of a certain kind of setup are going to lobby pretty hard to maintain that set up.

And you know, it's true of our economy too. We have a whole political economy around a certain set of way of running things. Bob Kaiser is here somewhere. He's got a book about how Washington has grown up to be the way it is and the power of money and lobbying.

And you know, it's true of China as well, right?There are export interests. There are local governors who are aligned with those interests. And they've built factories to export to the world on the basis of an exchange rate which is like "this" and if you say to them, "Actually, we're going to change the game on you and appreciate", they're not going to be happy.

ECONOMY: They're offering own their deals. Chinese companies are offering their own export rates -- currency rates. Very interesting, yeah.

ALDEN: Well, I mean, that is, actually, one of the competitive advantages for U.S. companies. Now we can drive really hard bargains in China. That may or may not be a good thing.

KING: Let's try first row again and then we'll move our way back.

QUESTIONER: Bob Bestani, Stanford University.

If I may, I'd like to play Devil's Advocate on the notion of China and their trade surpluses and current assets.

It seems to me the Chinese are now holding $1.5 trillion in assets. And they really should be using these funds internally, but they're not. But it seems to me that these figures pale in comparison to the global problem, which is much, much larger.

McKenzie Global Institute last year estimated that the global reserves that are swirling around looking for investments total $142 trillion. This year they upped it to $167 trillion and Bob Kimmitt, who just left Treasury, estimated the number at $190 trillion.

So I believe that Chairman Bernanke was correct when he talked about the surplus of funds around the world, but I'm wondering: Is it fair to be bashing the Chinese for this in the context of this much larger global reserves that are out there? Aren't we sort of picking on them for their two or three -- even if we said it was $10 trillion, it still seems to me it pales in comparison.

Thank you.

MALLABY: I mean, I'm actually not sure what this $160 trillion is supposed to refer to, but let me try and answer the question in another way, which is to say, look, obviously, in terms of official reserves, I think China holds actually 2 trillion (dollars), not 1.5 (trillion dollars), whatever.

The point is that when they began to run large export surpluses and the gap really grew, their view of their exchange rate had knock-on effects for other East Asian economies so it had a broader effect there. And the capital that flooded into the world at a relatively cheap rate ignited global growth, which led to higher commodity prices, which led to enormous surpluses in the oil exporting countries, which led to those sovereign wealth funds getting bigger and shedding more capital back into the global system.

So of course, China by itself is not the whole the story, but I think it was kind of at the core of the story. That's my point.

KING: Arno

QUESTIONER: Thank you. Arno DeBorgraff (sp).

Sebastian, could I take you over to the White House? You're the new national security adviser. Elizabeth is the secretary of State and Ed is the secretary of Defense.

The president's just called you on the carpet. Before midnight tonight, you have to think fast, because he would like to know: What are his three options on Iran? What would you be recommending?

MALLABY: Goodness, well -- (laughter) -- luckily, our former colleague, Gary Samore, is in real life --

(Cross talk.)

KING: The person who was supposed to preside tonight could have answered that question well for you, Arno, but he -- I'm happy to say -- has gone to -- we will miss him at the council, Gary Samore -- but he has gone to join the administration at the NSC and is handling Iran as one of the many issues in his portfolio.

So our colleagues here are focused on different parts of the world. So I'm not sure we're putting them in a fair position to ask them --

QUESTIONER: (Off mike) -- about what's going on in the world.

KING: Well, why don't we see if we've got someone else who can -- Camille. Right in front.

QUESTIONER: Thank you. I'm Camille Cesar (sp) from Commerce.

And thanks Elizabeth, Ed and Sebastian --great program.

My question is really this: Is the matter of our hoping that the Chinese will reflate their economy either through government spending and increasing the welfare of households -- I mean, is this a question of being, you know, not so careful of what we're hoping for, perhaps, in the long run? Because, you know, we have been recipients of this surplus for quite some time. And there's certainly a case to be made that we're dependent on it.

I was reading the blog of your colleague, Brad Setser, and he was pointing out that although bank lending isn't as bad as you might think -- I mean, of course, as you all know, asset-backed securities have no real market right now, and we're dependent on a lot of these funds. So if the Chinese move to a consumer-driven society where their GDP is primarily what it is in the United States, which is spending, consumption -- all this -- over the long term, I mean, given the number of people that they have; given their capacity to spend, if they are to approach a standard of living like our own, how much are they really going to be able to invest in our government securities, in our securitized assets, in things like that?

Thanks so much.

MALLABY: That's a good question. I mean, I think the way it feeds through the system is that, you know, if the Chinese spend more they consume more. That should be a boost to U.S. production. More U.S. production means more U.S. income in this country and more tax revenues and maybe a smaller deficit -- is one way of looking at it.

But I think more generally, the point is that we're in an unsustainable situation. You cannot as a country, the U.S., forever consume more than you produce and borrow the difference from foreigners. You can do it for a very long time, if you are the issuer of a reserve currency like the U.S. dollar. You cannot do it forever.

So we have to adjust at some point. We would prefer to adjust before the imbalance gets even worse and before we have another financial bubble blown up in our faces, which has been inflated by these imbalances.

And so adjustment is never nice, it's going to be painful -- but better to do it sooner rather than later.

KING: Back there.

QUESTIONER: Shar Exefer (sp) with the Department of Homeland Security.

Ted, I don't know if this is for you or for Sebastian, but taking this point about trying to increase domestic consumption in China, what can American firms do to better engage Chinese consumers? Do we have any power whatsoever -- do our businesses?

ALDEN: Well, I think, you know, the best power American companies have is that we have developed industry in areas that the Chinese very much need. Now, the extent to which they'll draw on them, I think, remains to be seen. But you know, if you're going to build a better health system in China, for instance. I mean, we have some of the most advanced health companies in the world. We have a lot to offer them on that front. There's all sorts of things we can do in helping them refine their administrative systems.

So I think there are opportunities there. Again, as I said, the person I wrote the article with -- Jeremy Haft -- has worked in China on the ground for a long time with Chinese businesses, has some sense of what they're looking for. So I think there are opportunities there, but they're likely to be slow in emerging. You know, this is not going to be any kind of enormous panacea, but I do think there are real opportunities.

MS. KING: Okay. David.

QUESTIONER: Thank you. David Apgar, BlueOrchard Finance.

I guess this question really is for any of you -- one more on China, though, if you don't mind.

And that is -- Sebastian has already started to sketch out a theory of one of the political reasons for China to rely on export growth, which is sort of an interest group model. Exporters are -- have built a lot of plant and equipment around expectations -- but what are some of the other political reasons why Chinese leadership may, over these decades, have continued to rely on export growth?

For example, is there still -- do you still give some credence to the idea that dollars reserves are sort of strategic or they enhance the power of the government in some way? Do you think that there might be some plausibility to the theory -- just to give one last example -- that the government somehow distrusts Chinese consumers to guide the economy and may, for some reasons, prefer Wal-Mart consumers to guide the Chinese economy -- or what other reasons are there?

The really interesting question -- the reason why I'd ask this one last question on China is: Should our view of this issue, which now has accounted for most of the questions here, should our view of this issue depend on why we think the Chinese leadership continues to pursue what is classically called sort of a policy of economic repression -- enforcing growth through exports?

ECONOMY: No. I was just trying to think.

I mean, you clearly -- until the Chinese can consume themselves, right -- and we're looking at a country, again, with 400 million people under $2 a day. They need jobs. And so I think employment is paramount for the Chinese leadership and will continue to be for the foreseeable future.

I think one of the things that they've, you know, talked about is obviously moving up the value chain. But as the coastal part moves up the value chain, they want the manufacturing and other things to be moving into the interior and the western parts of the country where they have most of the people who are not as well educated, not as well trained and who still need jobs.

I mean, their plans are to urbanize 400 million people between 2000 and 2030. That's the entire population -- that's more than the entire population of the United States! So you know, to a certain extent I don't think they feel -- even if they had a pension system that worked and a health care system that worked and a really true free education system throughout the whole country -- you know, K-12 -- they're still not at a level in much of the country where they can consume at a rate that I think would sustain their own internal growth. So they need to export and they need the manufacturing capacity for the employment.

I guess that's what struck me right off the bat as the one reason why they would continue to want to do that.

KING: I think everybody wants to weigh in here.

ALDEN: I just wanted to weigh in on the question of, what does that mean for the U.S. response?

We are in the midst of an experiment with China. I mean, our theory on China is that you bring China ever more deeply into the global economy; you give them an enormous stake in the success of that economy. And therefore, that makes it less likely that China emerges as a power hostile to American interests. We are very deeply wedded to that experiment. It's pretty hard to back out of it at this point. And that's, you know, where I think it gets very difficult going forward.

You know, if you hit a point where the Chinese, for reasons of internal stability, need to continue to export more than we would like them to because we see it hurting American producers. And you know, when unemployment hits 10 percent, as it may well, the noises will get a lot louder. That is going to be an extremely difficult decision and one that I'm afraid is probably going to confront this administration, which is, do we find ways to work closely with the Chinese, take some pain on each side in trying to manage our way through this? Or do we decide it's a zero-sum game and that we have to, in various ways, use tariffs or other tools to try to get the Chinese off the path of export-led growth because we believe it's hurting our interests?

So that's what I worry about going forward. I don't think we have any choice but to find some way to cooperate, but it's going to be difficult to stay on that path.

MALLABY: Yeah. I think I have a slightly different perspective to Liz on this one, which is that, you know, Chinese poverty ought to make one think that they would save less. I mean, normally, poorer people have less room to save. And so you've got an economy where, you know, they save more than 50 percent of their income.It's really bizarre when this many of them are that poor. And, goodness, how much poverty could we relieve in the world if they started to spend these savings on helping their own people rather than instead putting it in Treasury bills and helping us and lending to us, which is just completely -- it's money flowing uphill.

And you know, again, Brad Setser, who was mentioned before, in a report he did for us last year, did this great calculation where he showed that if you worked out all this money that the poor Chinese are putting into U.S. Treasuries and you figure out how much the U.S. dollar is likely to fall against the Renmimbi over time, the amount of money they're going to lose on their investments in Treasury securities basically looks like China is giving aid to the U.S. exceeding the size of the Marshall Plan to Europe as a share of GDP.

I mean, it's an incredible subsidy to the U.S. economy that they're doing this. So it doesn't make any sense for a poor country. I think your question is great, though, which is -- for the following reason. It seems to me that you're absolutely right. You could grow through domestic demand. There's no reason you have to do it through exports. So why did they do it this way? What got into them?

And my theory on this is that -- and this comes from my earlier work on development, writing about it at the World Bank and so forth -- is that, you know, there's always this catch-22 when you're a really poor country. You have got everything that's going wrong. You don't have infrastructure. You don't have anybody who's educated. The system is corrupt. You know, there's no proper customs service. And China's answer to this problem of the simultaneity of the challenges is that you can't get everything right everywhere, so we're going to cordon off these export zones on the edge of the country and get everything right in this small geographic area.

Now, when you do that, who are you going to sell to? I mean, you know, you're going to export. That leads you to a manufacturing-based, export-based growth model which is incredibly sensible and smart at the level of development they were at when they initiated this.

The trick for them to see is that now the coast of China is pretty much a modern economy, and they could make that shift. But all these interest groups have locked them into the model they started with, and it's difficult politically to make the shift. That would be my take.

ALDEN: And just quickly, I do think it's worth adding. It wasn't just a Chinese decision, right? This is something that we have encouraged them to do for many years. You know, we wanted them to be part of the global supply chain. This was something that was very much a feature of American policy, so it wasn't just the Chinese being sort of deliberately bloody-minded.

ECONOMY: No, but it's also interesting, though. You're absolutely right, Sebastian. So they had this special economic zone, and it was a little bit Reaganesque because it was supposed to be sort of trickle-down economics, right? So this area was going to get rich first, and then it was going to trickle down through the rest of the economy. It just never ended up trickling down in that way.

KING: We have about five minutes left, maybe time for two questions if we keep them short.

So this lady right here in the second row.

QUESTIONER: Thank you. My name is Lisa Friedman. I'm with ClimateWire. And I want to talk about climate policy, as you might have been able to predict from the name of my publication. China is hoping to get from the U.S. and the West clean technology or millions, billions for it. At climate change forums and environmental policy forums, the conventional wisdom is, yes, of course, technology transfer is key to getting a new global deal on climate change. This is key for China. It has to happen. I'm eager to ask some economic experts, you know, particularly in this economic situation, what is the likelihood of the U.S. giving clean-coal technology research or major clean technology to China? And maybe Elizabeth is best to answer that. You know, if that doesn't happen, how does climate policy play out with China going forward?

ECONOMY: I don't think we want to be giving away pretty much anything, frankly speaking. I think what I anticipate is, you know, a thrust on co-development of technology, right, so that as we're moving forward with things and we keep talking about -- you know, carbon capture and sequestration, you know, it's an expensive kind of demonstration project to pursue -- but that's something, you know, that we could work with the Chinese on and the Japanese and the European Union.

And it's a point that I've made now a couple of times in different forums because, of course, there's been this whole big push over the past several weeks with a couple of reports coming out talking about the viability of a U.S.-China climate pact and how this is somehow going to be a new pillar for the U.S.-China relationship. And at the same time, it's going to, you know, add all this new energy to climate change negotiations. And my feeling is, where are the resources going to come from within the United States for this kind of new climate pact? Because you're precisely right, what the Chinese want, you know, money and technology, right? Well, money and -- technology and, you know, not only just money, they want the technology, right, development.

And so I think the push will come to co-development. And then, you know, we already do have this Asia Pacific Partnership on Clean Development and Climate. And the question is -- I actually went back and looked. And I had spoken with someone recently and went back and looked at some of the projects that they have under way. This is the, you know, program that was initiated under the Bush administration, and I've never really thought much of it.

But I went -- and it has Korea, Japan, Canada, China, India and the U.S. And I looked, and they have maybe 40 projects on the books and probably 15 or 20 that are supposedly going on in China, and things like building energy efficiency and, you know, some clean-coal work, and all the different kinds of things you would expect to be going on.

And I guess before we start any major new initiatives, my feeling is we should be closely consulting with the Japanese who are very deeply engaged in climate change, technology transfer work with China. They have a very strong public-private effort, the Japanese government and Japanese companies in China and joint projects with Chinese across the full spectrum of climate change technologies, and the European Union which is pushing these kind of low-carbon zones.

So let's see? I don't think they've moved anywhere really on them, but they're talking about them. So let's talk to our allies, see what they're doing, try to determine where we have some kind of comparative advantage here and then look at what's going on with the Asia Pacific Partnership to see what's working, what's not and then move forward. Maybe we can put more money into it and make this work. I don't see a major new climate pact of any real substance coming out. And what I don't want to see is a bunch of hype that in the end is really meaningless, you know, because you're going to raise expectations, you're not going to have anything to back it up. And I think that's far worse than just taking the time and go step by step to see what's going on and what's already worked and what might work with a little more thought and a little more resources.

KING: Well, I'm terribly sorry. I'm afraid we have come to the end of our hour. I had hoped to get in one more question, but I'm afraid we're not going to be able to. I do want to remind everyone that this meeting has been on the record. And I want to thank our three panelists very much for a really rich conversation.

And thank you, all, for joining us tonight. Join me in thanking everyone. (Applause.)

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THIS IS A RUSH TRANSCRIPT.

KAY KING: Good evening, everyone, and welcome to this evening's meeting. I am Kay King, and I'm going to be the presider this evening.

Before we get started with the program, I want to go through the usual business of asking everyone to please turn off all cell phones, BlackBerrys and electronic devices. And I would ask that you turn them off completely, because even if they're on vibrate, they interfere with the sound system. And also I would like to remind everybody that this meeting this evening is on the record.

Again, I want to welcome you. This meeting is one in a continuing series that we have going on right now at the Council on the President's Inbox, a series that really looks at the major issues confronting the Obama administration in the foreign policy arena.

Tonight we are going to be discussing the global economy, trade, and U.S. relations with Asia, all issues very much in the news and very topical today, and obviously on the top of the Obama administration's agenda.

We'll start by looking at these issues as separate, distinct issues, but then inevitably the three come together. And so we will also look at them as they are linked.

We're hoping that we can, on the global economy, address the kind of range of actions that the Obama administration has been taking to determine not only the impact on the U.S. economy but on the broader global financial crisis. Also, as part of our discussion, we'll look at trade, and obviously that is a very -- an issue that's on the top of the Obama agenda with his trip to Ottawa today. And finally, of course, with Secretary Clinton's trip to Asia this week, it's really a perfect time to be looking at the U.S. relationship with Asia. So we will go through those three and then look at how they all come together.

So to help us better understand these issues, I am really delighted to welcome three of my Council colleagues this evening. First, let me welcome Liz Economy. Liz is the C.V. Starr senior fellow and director of Asia studies at the Council. She's published widely on China's domestic and foreign policy. And her most recent book is titled "The River Runs Black: The Environmental Challenge to China."

Sitting next to Liz is Ted Alden, and Ted is our Bernard L. Schwartz senior fellow who specializes in international competitiveness. He has worked at the Financial Times prior to joining the Council as a reporter, and he has written extensively on U.S. economic issues, trade policy and homeland security.

And while your original invitations listed Caroline Atkinson as our third speaker, I'm sorry she can't -- while I'm sorry she can't be with us, I really am delighted that Sebastian Mallaby has decided to forgo his presider role and agreed to join on the panel. And I think, as most of you know, Sebastian is our Paul Volcker fellow in international economics. He also runs the Maurice Greenberg Center for Geoeconomic Studies. Prior to joining the Council, he was a member of the editorial board at the Washington Post and a columnist there, and he also spent 13 years at The Economist.

So I think what we'll do is get started with you, Sebastian, if you don't mind, and that's focusing on the global economy. And unfortunately, the economic news continues to get worse, and the downturn really appears to be accelerating to the point where major economies like Britain, Germany, Japan, not to mention emerging economies like Russia and Brazil, have experienced unprecedented contraction.

And what I really want to get a sense from you is are all these measures that the Obama administration has taken in the economic realm, you know, are they leading -- are they going to kind of do the job, and not only with respect to the U.S. economy but to the broader global economy?

SEBASTIAN MALLABY: That's a good question. I mean, the challenge is enormous. If you look at the International Monetary Fund projections, for example, which were updated in January, what you see is a really cataclysmic reduction in their projections for global growth, even against what they were thinking in November.

If you take an economy like Russia, for example, which is one of the biggest changes, the amount by which Russia is expected to grow in 2009 has collapsed by 4 percentage points in the space of two months. So you have a huge dropoff. I think we haven't seen yet what the political knock oneffects of that might be in terms of heightened Russian authoritarianism or other effects. And around the world, there are different regions with different stresses coming out of this.

If you ask, "Has the Obama administration done enough yet to counteract this?" I think there's, you know, three points to make. One is that everyone would agree, given the severity of the downturn, that a lot of action is necessary from government. I mean, we've run this experiment before in the 1930s. When demand in the economy starts to spiral downward, it doesn't kind of correct itself by itself. And that was the lesson of the 19th century more generally, that when you had bad downturns without modern macroeconomic policy to counteract that, the downturn simply carried on.

So I think everyone would agree that you need to do bold things. Whether it's enough, I think not yet, actually, partly because some of the measures are lacking in detail, and so, notably on the financial rescue plan, there are a lot of dot-dot-dots to be filled in still, and also because the scale of the challenge is such that you really need a lot of action from other countries.

And in particular, I think the surplus countries, which had surplus savings going into this crisis, meaning particularly China and Germany, are going to be very, very important in coming forward with big stimulus .And looking forward to the April 2nd summit in London for the G-20, that's got to be the most urgent thing on the agenda is to coordinate the global response with stimulus of the scale that the Obama administration is trying, they've got to do that internationally.

KING: Thanks.

Ted, I'm going to turn to you now on the trade issue, and hoping I'm not putting you too much on the spot, but given that President Obama was in Ottawa, your homeland, today, and since, as a candidate, his apparent position on NAFTA caused considerable heartburn with Canadians, not to mention the "Buy America" provisions in the stimulus, can you give me a little bit of a sense of how those discussions might have gone today between President Obama and the prime minister? And also if you could maybe address the broader administration policy with regard to trade now that candidate Obama has become president.

TED ALDEN: Well, you know, I think, as president, Obama has done probably what we would have expected, which is to begin moving from the campaign rhetoric, which had a harder edge on trade, particularly in the places where that played well, in certain states in the Midwest, to his status as president now, which is he needs to think very carefully about the implications of each of these measures.

Reopening NAFTA at this time would obviously be a move that would raise a lot of concerns, not only in Canada and in Mexico, but around the world. And not surprisingly, the signal sent to the Canadians today was very much, well, you know, he's not entirely happy with the labor and environment provisions, but it's not a first-tier priority at the moment, and we have other more important things to work on in the relationship.

I think, with respect to the "Buy America" stuff, we saw something, you know, the same effort to kind of find a middle ground between the stances he took as a candidate and his responsibilities now as president, not completely knocking down the provisions in the bill, but saying in very forceful language, "We will stand by our obligations in the World Trade Organization." So, you know, I think he's off to a good start in that respect.

More broadly, I just want to say this is a very strange and interesting time in the world of trade policy. I mean, I began paying attention to this closely -- what was it -- probably 16, 17 years ago, when Ambassador Hills was our chief negotiator.

Since that time, we have built up a whole architecture of agreements with binding rules that were really a monumental accomplishment. But that was built up in the period in which growth was generally quite strong. We're now obviously in the midst of a very deep and severe downturn. And these institutions -- the WTO, NAFTA, our relationship with China -- have never been tested in this sort of environment.

So I think this is going to be the real trade challenge for this administration. You know, at the beginning of every previous administration, we asked what was the positive trade agenda? What are the deals that could still be done? What are the ways to move forward? I think the question for this administration is, how do you keep from moving backwards? How do you stave off protectionist pressures of various sorts that are certain in this environment to grow?

KING: And Liz, given that Secretary Clinton chose Asia as the first of her visits as secretary of State, it seems pretty clear that it is at the top of the Obama administration's agenda. And I'm just wondering if you could give us a sense of what items you think -- what issues you think Hillary Clinton should be raising in her discussions as she travels through the region; and even a little more detail about also what would you recommend that she be telling these leaders as she goes through these countries. What kind of recommendations should she be making?

ELIZABETH ECONOMY: Well, I think clearly Asia matters, right, and it matters a lot, and in large measure because of the issues that Sebastian and Ted have been talking about, which is, you know, you have three of the largest economies in the world, the three largest economies -- United States, Japan and China now. And not only that, but you have North Korea, which is clearly one of the world's regional hot spots that needs to be addressed quite urgently.

And I think if you look at any issue of global governance, whether you're talking about food safety or climate change, proliferation, intellectual property rights, Asia is really the center at this point in time. And what China does, what India does, is really going to shape the future of all of these issues, along with the United States. So I think it makes a lot of sense for Secretary Clinton to make her first trip there.

I think, you know, this is a very early trip, right? I think we've only had President Obama in power for a little bit over a month, right? And I can't remember when Secretary Clinton was confirmed, but it seems reasonably recently. So I don't think that this trip is a time for her to be laying out a new strategic road map for the region. In fact, I don't think she could, and I don't think she is.

It seems to me, as I've watched her so far in two countries and going to her third, including in China, that basically this is a kind of, yes, a listening tour, I think it's been called, which is a good thing, and a kind of kinder, gentler, "We're going to be more engaged" United States.

Let me say that I think we have been engaged certainly in East Asia. I don't think there's been a lack of engagement over the past eight years when it comes to China and North Korea. There's a kind of tendency to say we haven't been there, but we have been there. Southeast Asia maybe is a different story.

But I think, you know, in each place that she's visited, we've had, like, little presents given; a nice gift here or there. So we have -- you know, in Japan she met with the families of the abductees and she -- now Prime Minister Aso is going to be the first foreign leader to meet with President Obama in the United States. In Indonesia, we're talking about revisiting the Treaty of Amity and Cooperation. She's committed to attending ASEAN regional forums, something that Secretary Rice skipped a couple of times.

You know, I don't know what she's going to do in Korea. Poor Korea might get stuck just getting to talk about the free trade agreement -- (laughs) -- and about North Korea at this point, which has, you know, popped up as a very emergent issue. And in China, we already have these discussions about re-establishing mil-to-mil relations, and it seems as though there's some impetus for -- I don't know what this is going to look like, but some kind of renewed effort for a kind of discussion on climate change.

So I see this more, this first effort, as get out there to meet foreign leaders, to meet her counterparts, and basically to tell the region that we want to be engaged; we want to be more deeply engaged than we have been and we want to be more multilateral in our dealings, and we're here to listen to your concerns and we want to be responsive. And, frankly speaking, I think, at this point in time, that is the right message for her to be sending. I don't think she should be doing more. I think she needs to take stock of the situation.

KING: Actually, focusing in a little bit more on China per se, and as you indicated, we have been engaged in Asia and in China, and I think the Bush administration is really credited with strengthening our relationship with China, but a lot of people have said, and I believe Hillary Clinton herself has said, that they felt there was maybe a little bit too much focus on the economic relationship with China.

And I guess what I'd like to know from you is do you agree with that? And if you do agree with that, how would you suggest that we kind of redirect our relationship with China?

ECONOMY: Well, you know, sitting up in New York, we read these things, and we think I can't really tell whether, you know, she believes that or whether that's some kind of political power play down here in Washington. I think, you know, certainly what there was was a very aggressive effort on the part of Treasury, right. And I have Eugene, my friend here, who is part of the SED, sitting in the front row, the Strategic Economic Dialogue.

But it wasn't just on economic issues, which, of course, you know, are paramount in many respects, especially today, but also on energy and the environment. And so you had Treasury extending its reach, I think, well beyond what had been maybe the traditional brief of the, you know, Treasury Department.

And so I think we've already seen, you know, Secretary Clinton taking her climate person, Todd Stern, so clearly she's making some kind of play for that particular issue. I think if she's talking about -- and there was the senior political dialogue, it just didn't receive as much attention as the SED did. So, those things were going on. You know, I don't think it's the fault of Secretary Paulson that he was much more aggressive, perhaps.

If she's talking about introducing the issue of human rights, for example, -- and we had North Korean negotiations with China going on, and on, and on, and on, so I think the range of issues was reasonably well covered. If she's talking about one issue -- which I think was not terribly aggressively addressed, which would be human rights, I think then there's something to be discussed. And she did raise the issue in her speech at the Asia Society of religious freedom, and freedom for Tibetans and all Chinese -- religious freedom for Tibetans and all Chinese.

I mean, this is a tricky issue. And in the context of all the other priorities that we have with China, this is going to be tough. And she's picked a very difficult time, of course, to introduce this issue, which is one month before the anniversary of the 50th uprising in Tibet, not to mention we have the Tiananmen anniversary coming up on June 4th. I do think it's important --

KING: Twenty years.

ECONOMY: -- yeah, the 20th anniversary, right -- I think it's important to raise these issues, but I think, you know, again, before the secretary of State -- before the State Department gets too far out ahead of itself it needs to have a strategy. And you asked before what my recommendation would be, and let me just, you know, offer one suggestion here.

I think, yes, let's get out there and let's get back engaged with the Human Rights Council. And I think we should be strong and committed to our discussions on human rights, and talk with the Europeans who've been engaged in human rights discussions -- which haven't gone anywhere with the Chinese for the past several years also.

But, by the same token, maybe we should be focusing on issues of good governance. And doing that -- you know, so what I mean by that is transparency, official accountability, and the rule of law -- and doing that under the, sort of, rubric or guise of all of those issues of global governance, like climate change, you know, like proliferation, like food and product safety, all of those things demand better governance in China than we have today.

And so pushing those kinds of issues, by engaging China in those, you know, issues at the global level, and helping them understand that in order to address those issues effectively -- and I'd include intellectual property rights in this too, we've got to see some change and some capacity development on the ground in China.

So, that's what I see. I don't see that there has been too much of a focus on the economic side. I think it's just been a little more aggressive, and perhaps more -- well, not really successful, at least more aggressive.

KING: Staying with the topic of China, Ted, you and a colleague, Jeremy Haft, have written -- and let me make sure I got this straight, that "the economic downturn actually boosts America's competitive edge in China and presents the United States with a unique opportunity to create jobs and stimulate savings." Could you elaborate a little bit on that?

ALDEN: Well, this was an effort to put a positive spin on what, in a lot of ways, is a pretty gloomy situation, clearly. (Laughter.)

ECONOMY: Sounds good. (Laughs.)

ALDEN: So, you know, I think we actually need a -- well, there's, you know, there's a way in which, of course, the psychology of this is very reinforcing. You know, we get into a situation in which we, you know, have suddenly gone from tremendous over-optimism to, I think sometimes, catastrophic pessimism -- and I can certainly make a case for catastrophic pessimism.

But I think, you know, we very much need, in the situation we're in, to be looking for opportunities. And that was the point of that article. And the heart that -- and this really comes more from Jeremy, and I don't know if he's here in the audience; I wish he were, to spell it out -- but, you know, what the United States and China both need more than anything else is for China to begin to move to an internal demand-driven policy. I mean, we have had now two decades of export-driven policy out of China, which has resulted in an enormous build-up of Chinese reserves; imbalances in the global economy, which have been damaging to the United States and damaging to China.

So, I think there's a consensus - both China and the United States, that China needs to begin moving in the direction of greater levels of consumption by its own people. The best prospects for that are in areas involving delivery of social services -- (inaudible). You got a savings rate in China that's close to 50 percent because there's no social safety net to speak of, and people are saving for many years after their working lives end.

Jeremy has worked on the ground in China.He believes that there are a lot of opportunities for the sorts of skills that U.S. companies have, and can deliver, to help China make that transition. In the short-run, is that going to make up for the jobs that we're losing right now? No. Not close to it. But there's a way in which we can try to develop a positive agenda, working with China, to help them make that transformation.

I mean, in some ways the article was a plea to avoid going down the easy road, which is the confrontational road. Which is to say, you know, the Chinese need to move quickly on the currency; they need to revalue; it's China's fault for developing this huge surplus, and we really need to knock them over the head.

I think that there are more constructive ways to tackle this, in which the U.S. private sector and the U.S. government can work more closely with China to make a change that both countries know need to be made. So, that was the purpose of writing that.

KING: Well, looking at this from maybe a little less positive perspective, Sebastian, you have written that you agree with Secretary Geithner's assessment that China is a currency manipulator. And you've gone on to say that currency manipulation is one of the major causes of the financial crisis. I was wondering if you could elaborate a little bit on that for our audience?

MALLABY: Yeah, I think that I agree with Tim Geithner's position more than Tim Geithner does, -- (laughter) -- in the sense that, you know, when he was -- this was in his testimony, and then when he was given Q & A on this, he kind of backtracked a bit. And the signals I'm hearing are that, you know, the administration wants to wish it hadn't said that.

The reason I thought it was actually arguably constructive is that I think, objectively, it's true, as Ted was saying, that, you know, massive Chinese export-driven growth has created huge exports of capital to balance that, by definition. And once China decides to export capital on this unprecedented scale, it's going to drive down interest rates in a deficit economy, which is the United States.

And the Fed could have raised interest rates more in 2003, or so, and should have done, but the relationship between the longer end of the yield curve, and policy rates in the short-term had broken down. This was the famous conundrum that Greenspan talked about more than once. This was the so-called "savings glut" that Bernanke talked about before the crisis -- the subprime crisis hit us.

It was evident to these monetary policy experts that Chinese savings -- and, more generally, the capital flowing from the rest of the world, but I think China is at the core of it -- were doing something to the way that monetary policy was working here, and it was very difficult to prevent a bubble from inflating.

Now, there are people who say, well, we could deal with, you know, lots of capital inflows from China in other ways. We could have better regulation of our financial sector, better supervision of banks. I'm kind of pessimistic about that, having gone down that mouse hole a lot and looked at the proposals that people have for better managing the financial system. I think there are a couple that make sense, but in general, my view is that, at the end of the day, if there's huge amounts of cheap money flowing through a system there will be a bubble, it will blow up, and it will cause enormous economic collateral damage.

So, I think it's bad for us that China has this export model. I think it's bad for China that it has this export model because they've gone from growth which was 13 percent in 2007, to a projection now of less than 7 percent. On their own definition, they need 8 percent a year to generate jobs in sufficient quantities. They're not going to meet that. And so they have discovered what it's like to have an export-driven model and then see demand in the rest of the world collapse, and then you are left with nothing.

You know, there was talk awhile ago that, you know, China had become the engine of global growth. And if you looked simply at GDP numbers in the world and where the growth was coming from, it did look as though China was generating more -- extra growth than the U.S. was. But the truth was that the extra Chinese growth was dependent on being able to export to U.S. consumers. It was a model that wasn't going to work by itself.

So I think they've got themselves into a position where they -- they're stuck. And you could do export-driven growth for a long time in smaller East Asian countries, because they weren't so big in relation to the world economy. There just isn't room in the global economy for this big of an economy to grow that fast on the back of exports. So, they need to say that -- see that.

And I think -- you know, coming back to what Liz was saying, that a major challenge for this administration is to decide, diplomatically, how sensible is it, and how best can we do it, to talk to China about shifting, because I think a shift is very important for them and for us.

ALDEN: Can I just make one quick comment?

The trouble I had with Geithner's statement is the language -- the language on currency manipulation. I mean, there's no question that it's a fact that China manipulates its currency. I mean, we all know that. It, you know, strives to hold the renminbi at a particular value. That's currency manipulation on its face.

The problem is, under U.S. law, that's a term that has some consequence. And this is one of the first decisions that the Obama administration is going to be faced with, with respect to China, which is: April 15th, do they designate China as a currency manipulator? Which the Bush administration was never willing to do; they walked up to the edge of it but they were never willing to make that designation.

Now, making that designation, at some level, doesn't have any enormous practical consequences, all it does is it triggers a negotiation. But, if we make that designation, it immediately puts us into a confrontational position, vis-a-vis China, with regard to the question of the value of their currency. And I think that that will start the relationship, between this administration and China, off on a very poor footing.

I mean, there was progress made in the previous administration through negotiations, led by John Snow, with the Chinese. They, unfortunately, for a variety of reasons -- you know, the Chinese have decided to hold their currency at its present value, and I think that's a problem. But, I think if we make that designation, I think we trigger potentially escalating a confrontation with China.

That's going to be a very, very difficult decision for the administration, because if they don't make that designation, you could well have people in Congress -- the Schumer and the Grahams, come back and say, you know, we're going to start raising the heat on The Hill to force you to make that designation. So, I think this is a very difficult and consequential decision that's coming fast for this administration.

KING: Would any of you care to speculate as to what you think they might do, come April 15th?

ALDEN: I'll tell you what I think they should do, but --

KING: (Laughs.)

ALDEN: -- I don't know what they will do. It's a very, very hard decision.

ECONOMY: I don't know what they're going to do, but I do think it's an important moment in time. And I might end up agreeing with you, Ted, even though I tend to favor taking a tougher tack with China, generally.

But right now they're in the midst of their own debate. And so if you look at what some of the senior economic leaders in China are saying, and some of the economists are saying, there is a very big debate, very vibrant debate going on about what they should do about their currency.

And some are advocating that they should depreciate it because they want to kick-up their exports. And others are saying, "Look, in this global economy, kicking up our exports is not going to do any good, so let's not do that. We're not going to get what we want out of it, and we risk making everybody else really mad at us." So, I think it's a -- it's an interesting, sensitive moment in time in China, and whatever we do, we ought to take that into consideration.

Now, it doesn't mean that maybe having that leverage -- like we did with the Schumer Graham thing, for whatever it was worth -- out there, you know, as a potential stick, you know, to allow Secretary Geithner to say, "Listen, you know, I don't want to do this but I've got this sitting out here." Maybe that's worth something, I don't know, but I do think it's a difficult moment right now, and China's having its own debate about its currency.

At the same time I think it's -- the whole idea of developing domestic demand in China is, you know, the Chinese leadership has clearly pushed forth. They said, this is what we're doing, right. So, they've really, much more aggressively, pushed forward on this health plan, right, to provide health insurance and health care, you know, for the vast majority of the Chinese public. It was supposed to be done by 2020, now they're saying they're going to have it done by 2011. I don't believe it. Things never work out that way in China -- never. But, that's what they're saying.

What's interesting is, I happened to be in a meeting -- sorry to go on, but this may be sort of interesting -- I happened to be in a meeting yesterday with a senior provincial leader from China. And I was just sitting in on a meeting, his meeting was with supposed to be with somebody else. But, I was sitting there, and the other person -- the American was making the point that, in fact, this issue of, you know, developing demand was important, developing a social welfare net was critical, et cetera, et cetera. And he said, "Yes, yes, well, we already have all the mechanisms in place, they just don't work." (Laughter.)

Which was a funny thing to say, but then, as he went on, what he said is, "Actually, what we really need to do is raise the incomes of the Chinese people" -- you know, more than this idea of the social welfare net. And what I thought that pointed to was, even though they're preaching this idea of the, sort of, importance of developing a social welfare net, that still, in the back of their minds, the most important thing is this continued growth model, as they've been going -- like, raising the incomes, and that's going to serve, you know, as the mechanism to continue Chinese growth.

Anyway, it's just a --

MALLABY: Also, is it even true -- is it even true that they have it, but they -- it doesn't work?

ECONOMY: No, it's not true. It's not true.

MALLABY: It's not true. So, that's also quite revealing.

ECONOMY: So, it was funny in different ways, yeah. (Laughs.)

MALLABY: Right, yeah.

KING: Okay, well, with that, I would like to open the floor to all of your questions. And before I do, let me just remind you to please wait for a microphone, and to identify yourself by giving your name and your affiliation. And then I would ask you to ask just one question, and please try and keep it brief so that we can have as many people ask questions as possible.

So, with that, let me start right here with Paula.

QUESTIONER: Paula Stern, The Stern Group.

I guess I'd like to stay on China. And recognizing that the percentage of the GDP that goes towards -- that domestic consumption represents in China is so incredibly low, I'm wondering -- to use a famous word now -- if you would stress test the notion that the Chinese can turn around quickly enough -- either through shifting to domestic consumption with the health plan and everything else -- just how quickly can they do it? It looks like they're interested, but I'm just wondering, I mean, they've shocked us with how rapidly they've become an exports super power!

ECONOMY: All right. I'll take one stab and then, you know, welcome my colleagues to comment.

You know, I think sometimes we think about the success that China has had in terms of growing its economy and we stand in awe, as well we should, because I think what Deng Xiaoping did was he unleashed the power of the Chinese to make money, right, and to make money quickly. So it's all self-interest. It's all out there. Let's go make money!

I think the challenge, often times when you're looking at central policy as its driven down, is whether or not local officials and local business people feel that same sort of incentive, right? So what is the incentive that they have to put into place free education -- or real free education, which they're supposed to have but in many places don't; or to have health insurance with medical clinics and these kinds of things; or a workable pension plan. And I think that's -- or whatever it might be -- environmental protection.

And that, I think, is what makes it so much more difficult. And so I try to look and see: What are the incentives for these people to do the right thing? I'm not sure -- and then you have all the corruption, right, and the diversion of money that happens within the system.

And so I think we don't know the answer yet, right? It's going to take a little time to see what happens over the next -- I give them a year -- a year to see what's actually taking place with pension plans, what's actually taking place with medical clinics and health insurance. You know, it's a huge country. I mean, 1.3 billion people, 400 million of whom live on less than $2 a day! It's really incredible. I think we forget about much of what this country is really about.

And so I am pessimistic, but I want to leave my mind open to the fact that they're somehow going to find those incentives to get it done right. I just don't know what they are. And I think it's not the way that the officials have -- they've been talking about developing a social welfare net for a long time and it hasn't happened.

So I'm waiting to see what's new and what's different and I don't see anything yet.

KING: (Off mike.)

MALLABY: Yeah, as a general matter, I think, you know, any growth model builds into it sort of interest groups that do well out of that model and who are going to obstruct change. And so you know, I defer to Liz's expertise on China specifically, but you know, anyone who's lived in Japan as I did for three years, or other places, you see that export interests that do well out of a certain kind of setup are going to lobby pretty hard to maintain that set up.

And you know, it's true of our economy too. We have a whole political economy around a certain set of way of running things. Bob Kaiser is here somewhere. He's got a book about how Washington has grown up to be the way it is and the power of money and lobbying.

And you know, it's true of China as well, right?There are export interests. There are local governors who are aligned with those interests. And they've built factories to export to the world on the basis of an exchange rate which is like "this" and if you say to them, "Actually, we're going to change the game on you and appreciate", they're not going to be happy.

ECONOMY: They're offering own their deals. Chinese companies are offering their own export rates -- currency rates. Very interesting, yeah.

ALDEN: Well, I mean, that is, actually, one of the competitive advantages for U.S. companies. Now we can drive really hard bargains in China. That may or may not be a good thing.

KING: Let's try first row again and then we'll move our way back.

QUESTIONER: Bob Bestani, Stanford University.

If I may, I'd like to play Devil's Advocate on the notion of China and their trade surpluses and current assets.

It seems to me the Chinese are now holding $1.5 trillion in assets. And they really should be using these funds internally, but they're not. But it seems to me that these figures pale in comparison to the global problem, which is much, much larger.

McKenzie Global Institute last year estimated that the global reserves that are swirling around looking for investments total $142 trillion. This year they upped it to $167 trillion and Bob Kimmitt, who just left Treasury, estimated the number at $190 trillion.

So I believe that Chairman Bernanke was correct when he talked about the surplus of funds around the world, but I'm wondering: Is it fair to be bashing the Chinese for this in the context of this much larger global reserves that are out there? Aren't we sort of picking on them for their two or three -- even if we said it was $10 trillion, it still seems to me it pales in comparison.

Thank you.

MALLABY: I mean, I'm actually not sure what this $160 trillion is supposed to refer to, but let me try and answer the question in another way, which is to say, look, obviously, in terms of official reserves, I think China holds actually 2 trillion (dollars), not 1.5 (trillion dollars), whatever.

The point is that when they began to run large export surpluses and the gap really grew, their view of their exchange rate had knock-on effects for other East Asian economies so it had a broader effect there. And the capital that flooded into the world at a relatively cheap rate ignited global growth, which led to higher commodity prices, which led to enormous surpluses in the oil exporting countries, which led to those sovereign wealth funds getting bigger and shedding more capital back into the global system.

So of course, China by itself is not the whole the story, but I think it was kind of at the core of the story. That's my point.

KING: Arno

QUESTIONER: Thank you. Arno DeBorgraff (sp).

Sebastian, could I take you over to the White House? You're the new national security adviser. Elizabeth is the secretary of State and Ed is the secretary of Defense.

The president's just called you on the carpet. Before midnight tonight, you have to think fast, because he would like to know: What are his three options on Iran? What would you be recommending?

MALLABY: Goodness, well -- (laughter) -- luckily, our former colleague, Gary Samore, is in real life --

(Cross talk.)

KING: The person who was supposed to preside tonight could have answered that question well for you, Arno, but he -- I'm happy to say -- has gone to -- we will miss him at the council, Gary Samore -- but he has gone to join the administration at the NSC and is handling Iran as one of the many issues in his portfolio.

So our colleagues here are focused on different parts of the world. So I'm not sure we're putting them in a fair position to ask them --

QUESTIONER: (Off mike) -- about what's going on in the world.

KING: Well, why don't we see if we've got someone else who can -- Camille. Right in front.

QUESTIONER: Thank you. I'm Camille Cesar (sp) from Commerce.

And thanks Elizabeth, Ed and Sebastian --great program.

My question is really this: Is the matter of our hoping that the Chinese will reflate their economy either through government spending and increasing the welfare of households -- I mean, is this a question of being, you know, not so careful of what we're hoping for, perhaps, in the long run? Because, you know, we have been recipients of this surplus for quite some time. And there's certainly a case to be made that we're dependent on it.

I was reading the blog of your colleague, Brad Setser, and he was pointing out that although bank lending isn't as bad as you might think -- I mean, of course, as you all know, asset-backed securities have no real market right now, and we're dependent on a lot of these funds. So if the Chinese move to a consumer-driven society where their GDP is primarily what it is in the United States, which is spending, consumption -- all this -- over the long term, I mean, given the number of people that they have; given their capacity to spend, if they are to approach a standard of living like our own, how much are they really going to be able to invest in our government securities, in our securitized assets, in things like that?

Thanks so much.

MALLABY: That's a good question. I mean, I think the way it feeds through the system is that, you know, if the Chinese spend more they consume more. That should be a boost to U.S. production. More U.S. production means more U.S. income in this country and more tax revenues and maybe a smaller deficit -- is one way of looking at it.

But I think more generally, the point is that we're in an unsustainable situation. You cannot as a country, the U.S., forever consume more than you produce and borrow the difference from foreigners. You can do it for a very long time, if you are the issuer of a reserve currency like the U.S. dollar. You cannot do it forever.

So we have to adjust at some point. We would prefer to adjust before the imbalance gets even worse and before we have another financial bubble blown up in our faces, which has been inflated by these imbalances.

And so adjustment is never nice, it's going to be painful -- but better to do it sooner rather than later.

KING: Back there.

QUESTIONER: Shar Exefer (sp) with the Department of Homeland Security.

Ted, I don't know if this is for you or for Sebastian, but taking this point about trying to increase domestic consumption in China, what can American firms do to better engage Chinese consumers? Do we have any power whatsoever -- do our businesses?

ALDEN: Well, I think, you know, the best power American companies have is that we have developed industry in areas that the Chinese very much need. Now, the extent to which they'll draw on them, I think, remains to be seen. But you know, if you're going to build a better health system in China, for instance. I mean, we have some of the most advanced health companies in the world. We have a lot to offer them on that front. There's all sorts of things we can do in helping them refine their administrative systems.

So I think there are opportunities there. Again, as I said, the person I wrote the article with -- Jeremy Haft -- has worked in China on the ground for a long time with Chinese businesses, has some sense of what they're looking for. So I think there are opportunities there, but they're likely to be slow in emerging. You know, this is not going to be any kind of enormous panacea, but I do think there are real opportunities.

MS. KING: Okay. David.

QUESTIONER: Thank you. David Apgar, BlueOrchard Finance.

I guess this question really is for any of you -- one more on China, though, if you don't mind.

And that is -- Sebastian has already started to sketch out a theory of one of the political reasons for China to rely on export growth, which is sort of an interest group model. Exporters are -- have built a lot of plant and equipment around expectations -- but what are some of the other political reasons why Chinese leadership may, over these decades, have continued to rely on export growth?

For example, is there still -- do you still give some credence to the idea that dollars reserves are sort of strategic or they enhance the power of the government in some way? Do you think that there might be some plausibility to the theory -- just to give one last example -- that the government somehow distrusts Chinese consumers to guide the economy and may, for some reasons, prefer Wal-Mart consumers to guide the Chinese economy -- or what other reasons are there?

The really interesting question -- the reason why I'd ask this one last question on China is: Should our view of this issue, which now has accounted for most of the questions here, should our view of this issue depend on why we think the Chinese leadership continues to pursue what is classically called sort of a policy of economic repression -- enforcing growth through exports?

ECONOMY: No. I was just trying to think.

I mean, you clearly -- until the Chinese can consume themselves, right -- and we're looking at a country, again, with 400 million people under $2 a day. They need jobs. And so I think employment is paramount for the Chinese leadership and will continue to be for the foreseeable future.

I think one of the things that they've, you know, talked about is obviously moving up the value chain. But as the coastal part moves up the value chain, they want the manufacturing and other things to be moving into the interior and the western parts of the country where they have most of the people who are not as well educated, not as well trained and who still need jobs.

I mean, their plans are to urbanize 400 million people between 2000 and 2030. That's the entire population -- that's more than the entire population of the United States! So you know, to a certain extent I don't think they feel -- even if they had a pension system that worked and a health care system that worked and a really true free education system throughout the whole country -- you know, K-12 -- they're still not at a level in much of the country where they can consume at a rate that I think would sustain their own internal growth. So they need to export and they need the manufacturing capacity for the employment.

I guess that's what struck me right off the bat as the one reason why they would continue to want to do that.

KING: I think everybody wants to weigh in here.

ALDEN: I just wanted to weigh in on the question of, what does that mean for the U.S. response?

We are in the midst of an experiment with China. I mean, our theory on China is that you bring China ever more deeply into the global economy; you give them an enormous stake in the success of that economy. And therefore, that makes it less likely that China emerges as a power hostile to American interests. We are very deeply wedded to that experiment. It's pretty hard to back out of it at this point. And that's, you know, where I think it gets very difficult going forward.

You know, if you hit a point where the Chinese, for reasons of internal stability, need to continue to export more than we would like them to because we see it hurting American producers. And you know, when unemployment hits 10 percent, as it may well, the noises will get a lot louder. That is going to be an extremely difficult decision and one that I'm afraid is probably going to confront this administration, which is, do we find ways to work closely with the Chinese, take some pain on each side in trying to manage our way through this? Or do we decide it's a zero-sum game and that we have to, in various ways, use tariffs or other tools to try to get the Chinese off the path of export-led growth because we believe it's hurting our interests?

So that's what I worry about going forward. I don't think we have any choice but to find some way to cooperate, but it's going to be difficult to stay on that path.

MALLABY: Yeah. I think I have a slightly different perspective to Liz on this one, which is that, you know, Chinese poverty ought to make one think that they would save less. I mean, normally, poorer people have less room to save. And so you've got an economy where, you know, they save more than 50 percent of their income.It's really bizarre when this many of them are that poor. And, goodness, how much poverty could we relieve in the world if they started to spend these savings on helping their own people rather than instead putting it in Treasury bills and helping us and lending to us, which is just completely -- it's money flowing uphill.

And you know, again, Brad Setser, who was mentioned before, in a report he did for us last year, did this great calculation where he showed that if you worked out all this money that the poor Chinese are putting into U.S. Treasuries and you figure out how much the U.S. dollar is likely to fall against the Renmimbi over time, the amount of money they're going to lose on their investments in Treasury securities basically looks like China is giving aid to the U.S. exceeding the size of the Marshall Plan to Europe as a share of GDP.

I mean, it's an incredible subsidy to the U.S. economy that they're doing this. So it doesn't make any sense for a poor country. I think your question is great, though, which is -- for the following reason. It seems to me that you're absolutely right. You could grow through domestic demand. There's no reason you have to do it through exports. So why did they do it this way? What got into them?

And my theory on this is that -- and this comes from my earlier work on development, writing about it at the World Bank and so forth -- is that, you know, there's always this catch-22 when you're a really poor country. You have got everything that's going wrong. You don't have infrastructure. You don't have anybody who's educated. The system is corrupt. You know, there's no proper customs service. And China's answer to this problem of the simultaneity of the challenges is that you can't get everything right everywhere, so we're going to cordon off these export zones on the edge of the country and get everything right in this small geographic area.

Now, when you do that, who are you going to sell to? I mean, you know, you're going to export. That leads you to a manufacturing-based, export-based growth model which is incredibly sensible and smart at the level of development they were at when they initiated this.

The trick for them to see is that now the coast of China is pretty much a modern economy, and they could make that shift. But all these interest groups have locked them into the model they started with, and it's difficult politically to make the shift. That would be my take.

ALDEN: And just quickly, I do think it's worth adding. It wasn't just a Chinese decision, right? This is something that we have encouraged them to do for many years. You know, we wanted them to be part of the global supply chain. This was something that was very much a feature of American policy, so it wasn't just the Chinese being sort of deliberately bloody-minded.

ECONOMY: No, but it's also interesting, though. You're absolutely right, Sebastian. So they had this special economic zone, and it was a little bit Reaganesque because it was supposed to be sort of trickle-down economics, right? So this area was going to get rich first, and then it was going to trickle down through the rest of the economy. It just never ended up trickling down in that way.

KING: We have about five minutes left, maybe time for two questions if we keep them short.

So this lady right here in the second row.

QUESTIONER: Thank you. My name is Lisa Friedman. I'm with ClimateWire. And I want to talk about climate policy, as you might have been able to predict from the name of my publication. China is hoping to get from the U.S. and the West clean technology or millions, billions for it. At climate change forums and environmental policy forums, the conventional wisdom is, yes, of course, technology transfer is key to getting a new global deal on climate change. This is key for China. It has to happen. I'm eager to ask some economic experts, you know, particularly in this economic situation, what is the likelihood of the U.S. giving clean-coal technology research or major clean technology to China? And maybe Elizabeth is best to answer that. You know, if that doesn't happen, how does climate policy play out with China going forward?

ECONOMY: I don't think we want to be giving away pretty much anything, frankly speaking. I think what I anticipate is, you know, a thrust on co-development of technology, right, so that as we're moving forward with things and we keep talking about -- you know, carbon capture and sequestration, you know, it's an expensive kind of demonstration project to pursue -- but that's something, you know, that we could work with the Chinese on and the Japanese and the European Union.

And it's a point that I've made now a couple of times in different forums because, of course, there's been this whole big push over the past several weeks with a couple of reports coming out talking about the viability of a U.S.-China climate pact and how this is somehow going to be a new pillar for the U.S.-China relationship. And at the same time, it's going to, you know, add all this new energy to climate change negotiations. And my feeling is, where are the resources going to come from within the United States for this kind of new climate pact? Because you're precisely right, what the Chinese want, you know, money and technology, right? Well, money and -- technology and, you know, not only just money, they want the technology, right, development.

And so I think the push will come to co-development. And then, you know, we already do have this Asia Pacific Partnership on Clean Development and Climate. And the question is -- I actually went back and looked. And I had spoken with someone recently and went back and looked at some of the projects that they have under way. This is the, you know, program that was initiated under the Bush administration, and I've never really thought much of it.

But I went -- and it has Korea, Japan, Canada, China, India and the U.S. And I looked, and they have maybe 40 projects on the books and probably 15 or 20 that are supposedly going on in China, and things like building energy efficiency and, you know, some clean-coal work, and all the different kinds of things you would expect to be going on.

And I guess before we start any major new initiatives, my feeling is we should be closely consulting with the Japanese who are very deeply engaged in climate change, technology transfer work with China. They have a very strong public-private effort, the Japanese government and Japanese companies in China and joint projects with Chinese across the full spectrum of climate change technologies, and the European Union which is pushing these kind of low-carbon zones.

So let's see? I don't think they've moved anywhere really on them, but they're talking about them. So let's talk to our allies, see what they're doing, try to determine where we have some kind of comparative advantage here and then look at what's going on with the Asia Pacific Partnership to see what's working, what's not and then move forward. Maybe we can put more money into it and make this work. I don't see a major new climate pact of any real substance coming out. And what I don't want to see is a bunch of hype that in the end is really meaningless, you know, because you're going to raise expectations, you're not going to have anything to back it up. And I think that's far worse than just taking the time and go step by step to see what's going on and what's already worked and what might work with a little more thought and a little more resources.

KING: Well, I'm terribly sorry. I'm afraid we have come to the end of our hour. I had hoped to get in one more question, but I'm afraid we're not going to be able to. I do want to remind everyone that this meeting has been on the record. And I want to thank our three panelists very much for a really rich conversation.

And thank you, all, for joining us tonight. Join me in thanking everyone. (Applause.)

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